Overview

Dataset info

Number of variables46
Number of observations3330
Missing cells15029 (9.8%)
Duplicate rows0 (0.0%)
Total size in memory1.1 MiB
Average record size in memory333.0 B

Variables types

Numeric26
Categorical7
Boolean6
Date0
URL0
Text (Unique)1
Rejected6
Unsupported0

Warnings

age has 92 (2.8%) zeros Zeros
age has 182 (5.5%) missing values Missing
blueSky has 1328 (39.9%) missing values Missing
bookValue has 418 (12.6%) missing values Missing
city has a high cardinality: 948 distinct values Warning
closeDay1 has 115 (3.5%) missing values Missing
commonEquity is highly skewed (γ1 = -41.06869092) Skewed
commonEquity has 679 (20.4%) missing values Missing
commonEquity.1 has 505 (15.2%) missing values Missing
investmentReceived is highly skewed (γ1 = 36.1068583) Skewed
investmentReceived has 1500 (45.0%) missing values Missing
ipoSize is highly correlated with amountOnProspectus (ρ = 0.9926927282) Rejected
leverage has 633 (19.0%) zeros Zeros
leverage has 376 (11.3%) missing values Missing
managementFee is highly correlated with ipoSize (ρ = 0.9167136414) Rejected
manager has a high cardinality: 1487 distinct values Warning
nasdaq2weeksBefore is highly correlated with dj2weeksBefore (ρ = 0.9299237865) Rejected
netIncome has 392 (11.8%) missing values Missing
nExecutives has 1429 (42.9%) missing values Missing
nPatents is highly skewed (γ1 = 29.0217917) Skewed
nPatents has 2491 (74.8%) zeros Zeros
nVCs has 1329 (39.9%) missing values Missing
patRatio has 266 (8.0%) zeros Zeros
patRatio has 1287 (38.6%) missing values Missing
priorFinancing has 113 (3.4%) zeros Zeros
priorFinancing has 1417 (42.6%) missing values Missing
reputationAvg has 44 (1.3%) zeros Zeros
reputationLeadAvg has 230 (6.9%) zeros Zeros
reputationLeadMax has 230 (6.9%) zeros Zeros
reputationSum is highly correlated with nUnderwriters (ρ = 0.9577851468) Rejected
rf has a high cardinality: 3058 distinct values Warning
rf has 273 (8.2%) missing values Missing
roa has 392 (11.8%) missing values Missing
sharesOfferedPerc has 262 (7.9%) missing values Missing
sp2weeksBefore is highly correlated with nasdaq2weeksBefore (ρ = 0.964605601) Rejected
totalAssets has 357 (10.7%) missing values Missing
totalProceeds is highly correlated with ipoSize (ρ = 0.9951531237) Rejected
totalRevenue is highly skewed (γ1 = 29.07194647) Skewed
totalRevenue has 176 (5.3%) zeros Zeros
totalRevenue has 375 (11.3%) missing values Missing

Variables

age
Numeric

Distinct count134
Unique (%)4.0%
Missing (%)5.5%
Missing (n)182
Infinite (%)0.0%
Infinite (n)0
Mean16.18456163
Minimum0
Maximum175
Zeros (%)2.8%
Mini histogram

Quantile statistics

Minimum0
5-th percentile1
Q14
Median8
Q317
95-th percentile67.65
Maximum175
Range175
Interquartile range13

Descriptive statistics

Standard deviation22.56715973
Coef of variation1.39436336
Kurtosis10.12220304
Mean16.18456163
MAD14.18712532
Skewness2.968657105
Sum50949
Variance509.2766983
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
3 220 6.6%
 
4 217 6.5%
 
7 197 5.9%
 
5 191 5.7%
 
6 186 5.6%
 
2 183 5.5%
 
8 175 5.3%
 
1 152 4.6%
 
9 134 4.0%
 
10 119 3.6%
 
Other values (123) 1374 41.3%
 
(Missing) 182 5.5%
 

Minimum 5 values

ValueCountFrequency (%) 
0 92 2.8%
 
1 152 4.6%
 
2 183 5.5%
 
3 220 6.6%
 
4 217 6.5%
 

Maximum 5 values

ValueCountFrequency (%) 
175 1 < 0.1%
 
165 1 < 0.1%
 
159 1 < 0.1%
 
158 1 < 0.1%
 
157 1 < 0.1%
 

amountOnProspectus
Numeric

Distinct count1413
Unique (%)42.4%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean178.2675375
Minimum1.4
Maximum16006.9
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum1.4
5-th percentile15.1
Q143.2
Median80
Q3160
95-th percentile600
Maximum16006.9
Range16005.5
Interquartile range116.8

Descriptive statistics

Standard deviation508.2252318
Coef of variation2.850912952
Kurtosis558.7865097
Mean178.2675375
MAD169.3414611
Skewness19.61089764
Sum593630.9
Variance258292.8862
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[1.40000e+00 5.45000e+00 1.49500e+01 1.50500e+01 1.99000e+01 ... 7.28250e+02 9.70500e+02 1.91995e+03 4.14425e+03 1.60069e+04], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
75 44 1.3%
 
60 42 1.3%
 
90 30 0.9%
 
40 29 0.9%
 
48 28 0.8%
 
72 27 0.8%
 
45 27 0.8%
 
56 27 0.8%
 
50 25 0.8%
 
35 24 0.7%
 
Other values (1403) 3027 90.9%
 

Minimum 5 values

ValueCountFrequency (%) 
1.4 1 < 0.1%
 
1.7 1 < 0.1%
 
3 1 < 0.1%
 
3.3 1 < 0.1%
 
3.5 2 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
16006.9 1 < 0.1%
 
15774 1 < 0.1%
 
5470 1 < 0.1%
 
4403.5 1 < 0.1%
 
3885 1 < 0.1%
 

blueSky
Numeric

Distinct count75
Unique (%)2.3%
Missing (%)39.9%
Missing (n)1328
Infinite (%)0.0%
Infinite (n)0
Mean12916.11588
Minimum500
Maximum450000
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum500
5-th percentile2500
Q15000
Median10000
Q315000
95-th percentile30000
Maximum450000
Range449500
Interquartile range10000

Descriptive statistics

Standard deviation18172.97985
Coef of variation1.407000372
Kurtosis344.3270521
Mean12916.11588
MAD7785.676912
Skewness15.37073646
Sum25858064
Variance330257196.7
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
10000 540 16.2%
 
5000 492 14.8%
 
15000 289 8.7%
 
20000 126 3.8%
 
25000 94 2.8%
 
7500 79 2.4%
 
30000 45 1.4%
 
3000 38 1.1%
 
2500 37 1.1%
 
1000 33 1.0%
 
Other values (64) 229 6.9%
 
(Missing) 1328 39.9%
 

Minimum 5 values

ValueCountFrequency (%) 
500 3 0.1%
 
600 1 < 0.1%
 
1000 33 1.0%
 
1500 7 0.2%
 
2000 28 0.8%
 

Maximum 5 values

ValueCountFrequency (%) 
450000 2 0.1%
 
225000 1 < 0.1%
 
130000 1 < 0.1%
 
100000 2 0.1%
 
85000 2 0.1%
 

bookValue
Numeric

Distinct count2906
Unique (%)87.3%
Missing (%)12.6%
Missing (n)418
Infinite (%)0.0%
Infinite (n)0
Mean283.4410952
Minimum-8258.009719
Maximum24277.0171
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum-8258.009719
5-th percentile-17.77385478
Q134.59567015
Median86.0785325
Q3198.504079
95-th percentile1077.047681
Maximum24277.0171
Range32535.02682
Interquartile range163.9084089

Descriptive statistics

Standard deviation1113.94607
Coef of variation3.930079614
Kurtosis187.5373949
Mean283.4410952
MAD355.7282402
Skewness11.63639104
Sum825380.4692
Variance1240875.847
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
3931.997152 4 0.1%
 
5.712912 2 0.1%
 
149.1215551 2 0.1%
 
5.6281 2 0.1%
 
6.9195302 2 0.1%
 
1039.989813 1 < 0.1%
 
-75.0548397 1 < 0.1%
 
279.9302646 1 < 0.1%
 
80.173881 1 < 0.1%
 
-10.045071 1 < 0.1%
 
Other values (2895) 2895 86.9%
 
(Missing) 418 12.6%
 

Minimum 5 values

ValueCountFrequency (%) 
-8258.009719 1 < 0.1%
 
-4480.0044 1 < 0.1%
 
-1591.001525 1 < 0.1%
 
-1076.762882 1 < 0.1%
 
-1029.855908 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
24277.0171 1 < 0.1%
 
20453.00848 1 < 0.1%
 
19267.99367 1 < 0.1%
 
16388.96976 1 < 0.1%
 
13866.02123 1 < 0.1%
 

city
Categorical

Distinct count948
Unique (%)28.5%
Missing (%)< 0.1%
Missing (n)1
NEW YORK
 
195
HOUSTON
 
98
SAN DIEGO
 
87
Other values (944)
2949
ValueCountFrequency (%) 
NEW YORK 195 5.9%
 
HOUSTON 98 2.9%
 
SAN DIEGO 87 2.6%
 
CAMBRIDGE 78 2.3%
 
SAN FRANCISCO 71 2.1%
 
DALLAS 57 1.7%
 
SUNNYVALE 53 1.6%
 
CHICAGO 48 1.4%
 
SAN JOSE 47 1.4%
 
SANTA CLARA 42 1.3%
 
Other values (937) 2553 76.7%
 
Max length30
Mean length9.136036036
Min length3
Contains charsTrue
Contains digitsTrue
Contains spacesTrue
Contains non-wordsTrue

closeDay1
Numeric

Distinct count1437
Unique (%)43.2%
Missing (%)3.5%
Missing (n)115
Infinite (%)0.0%
Infinite (n)0
Mean18.84196146
Minimum-17.125
Maximum280
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum-17.125
5-th percentile7
Q111.34375
Median15.5625
Q321.75
95-th percentile40.01875
Maximum280
Range297.125
Interquartile range10.40625

Descriptive statistics

Standard deviation15.02031499
Coef of variation0.7971736395
Kurtosis69.18363178
Mean18.84196146
MAD8.333906389
Skewness6.184502865
Sum60576.90608
Variance225.6098624
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
13 38 1.1%
 
15 37 1.1%
 
20 34 1.0%
 
12 33 1.0%
 
14 30 0.9%
 
10 28 0.8%
 
8 27 0.8%
 
9 27 0.8%
 
11 27 0.8%
 
16 26 0.8%
 
Other values (1426) 2908 87.3%
 
(Missing) 115 3.5%
 

Minimum 5 values

ValueCountFrequency (%) 
-17.125 1 < 0.1%
 
3.875 1 < 0.1%
 
3.98 2 0.1%
 
4 2 0.1%
 
4.01 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
280 1 < 0.1%
 
239.25 1 < 0.1%
 
212.625 1 < 0.1%
 
184.75 1 < 0.1%
 
172 1 < 0.1%
 

commonEquity
Numeric

Distinct count1740
Unique (%)52.3%
Missing (%)20.4%
Missing (n)679
Infinite (%)0.0%
Infinite (n)0
Mean-0.8645650698
Minimum-372.24
Maximum8.892
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum-372.24
5-th percentile-4.225
Q1-0.9375
Median0.062
Q30.4245
95-th percentile0.869
Maximum8.892
Range381.132
Interquartile range1.362

Descriptive statistics

Standard deviation7.813684084
Coef of variation-9.037705035
Kurtosis1930.051669
Mean-0.8645650698
MAD1.597567723
Skewness-41.06869092
Sum-2291.962
Variance61.05365897
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
0.061 11 0.3%
 
0.078 8 0.2%
 
0.098 7 0.2%
 
0.115 6 0.2%
 
0.174 6 0.2%
 
0.076 6 0.2%
 
0.177 6 0.2%
 
0.102 6 0.2%
 
0.153 6 0.2%
 
0.646 5 0.2%
 
Other values (1729) 2584 77.6%
 
(Missing) 679 20.4%
 

Minimum 5 values

ValueCountFrequency (%) 
-372.24 1 < 0.1%
 
-61.086 1 < 0.1%
 
-54.46 1 < 0.1%
 
-44.52 1 < 0.1%
 
-31.386 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
8.892 1 < 0.1%
 
5.651 1 < 0.1%
 
3.702 1 < 0.1%
 
1.663 1 < 0.1%
 
1.204 1 < 0.1%
 

commonEquity.1
Numeric

Distinct count1743
Unique (%)52.3%
Missing (%)15.2%
Missing (n)505
Infinite (%)0.0%
Infinite (n)0
Mean78.56334513
Minimum0.37
Maximum374.75
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum0.37
5-th percentile21.552
Q161.49
Median92.84
Q399.82
95-th percentile100
Maximum374.75
Range374.38
Interquartile range38.33

Descriptive statistics

Standard deviation27.53337347
Coef of variation0.3504608087
Kurtosis4.572609728
Mean78.56334513
MAD22.63322617
Skewness-0.6040774515
Sum221941.45
Variance758.0866547
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
100 652 19.6%
 
99.91 7 0.2%
 
97.62 6 0.2%
 
98.02 6 0.2%
 
99.66 6 0.2%
 
99.87 6 0.2%
 
98.38 5 0.2%
 
97.88 5 0.2%
 
96.77 5 0.2%
 
99.92 5 0.2%
 
Other values (1732) 2122 63.7%
 
(Missing) 505 15.2%
 

Minimum 5 values

ValueCountFrequency (%) 
0.37 1 < 0.1%
 
0.52 1 < 0.1%
 
1 1 < 0.1%
 
1.35 1 < 0.1%
 
1.51 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
374.75 1 < 0.1%
 
175.49 1 < 0.1%
 
130.68 1 < 0.1%
 
101.01 1 < 0.1%
 
100.85 1 < 0.1%
 

dj2weeksBefore
Numeric

Distinct count1842
Unique (%)55.3%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean12046.48373
Minimum5032.94
Maximum26828.39
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum5032.94
5-th percentile6593.235
Q19323.15
Median10711.385
Q313577.3
95-th percentile22371.3135
Maximum26828.39
Range21795.45
Interquartile range4254.15

Descriptive statistics

Standard deviation4466.449885
Coef of variation0.370767934
Kurtosis1.470803936
Mean12046.48373
MAD3370.453536
Skewness1.302349067
Sum40114790.83
Variance19949174.58
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[ 5032.94 5478.94 5868.295 5879.765 6071.49 ... 24129.325 25397.915 25973.025 26008.365 26828.39 ], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
10516.48 9 0.3%
 
11008.17 8 0.2%
 
5877.36 8 0.2%
 
10696.08 8 0.2%
 
9314.28 7 0.2%
 
7683.24 7 0.2%
 
25146.39 7 0.2%
 
17827.75 7 0.2%
 
5921.67 7 0.2%
 
10788.7 7 0.2%
 
Other values (1832) 3255 97.7%
 

Minimum 5 values

ValueCountFrequency (%) 
5032.94 1 < 0.1%
 
5130.13 2 0.1%
 
5192.27 1 < 0.1%
 
5304.98 1 < 0.1%
 
5459.61 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
26828.39 2 0.1%
 
26627.48 2 0.1%
 
26616.71 1 < 0.1%
 
26439.93 2 0.1%
 
26405.76 2 0.1%
 

egc
Boolean

Distinct count2
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
False
2586
True
744
ValueCountFrequency (%) 
False 2586 77.7%
 
True 744 22.3%
 

exchange
Categorical

Distinct count3
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
NASDQ
2368
NYSE
895
AMEX
 
67
ValueCountFrequency (%) 
NASDQ 2368 71.1%
 
NYSE 895 26.9%
 
AMEX 67 2.0%
 
Max length5
Mean length4.711111111
Min length4
Contains charsTrue
Contains digitsFalse
Contains spacesFalse
Contains non-wordsFalse

highTech
Boolean

Distinct count2
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
True
1805
False
1525
ValueCountFrequency (%) 
True 1805 54.2%
 
False 1525 45.8%
 

html
Boolean

Distinct count2
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
True
1957
False
1373
ValueCountFrequency (%) 
True 1957 58.8%
 
False 1373 41.2%
 

industryFF12
Categorical

Distinct count12
Unique (%)0.4%
Missing (%)0.0%
Missing (n)0
Business Equipment -- Computers, Software, and Electronic Equipment
945
Healthcare, Medical Equipment, and Drugs
621
Finance
483
Other values (9)
1281
ValueCountFrequency (%) 
Business Equipment -- Computers, Software, and Electronic Equipment 945 28.4%
 
Healthcare, Medical Equipment, and Drugs 621 18.6%
 
Finance 483 14.5%
 
Other 462 13.9%
 
Wholesale, Retail, and Some Services (Laundries, Repair Shops) 271 8.1%
 
Manufacturing -- Machinery, Trucks, Planes, Off Furn, Paper, Com Printing 142 4.3%
 
Telephone and Television Transmission 130 3.9%
 
Oil, Gas, and Coal Extraction and Products 89 2.7%
 
Consumer NonDurables -- Food, Tobacco, Textiles, Apparel, Leather, Toys 83 2.5%
 
Chemicals and Allied Products 39 1.2%
 
Other values (2) 65 2.0%
 
Max length73
Mean length41.83663664
Min length5
Contains charsTrue
Contains digitsFalse
Contains spacesTrue
Contains non-wordsTrue

industryFF48
Categorical

Distinct count48
Unique (%)1.4%
Missing (%)0.0%
Missing (n)0
Business Services
845
Pharmaceutical Products
409
Trading
 
221
Other values (45)
1855
ValueCountFrequency (%) 
Business Services 845 25.4%
 
Pharmaceutical Products 409 12.3%
 
Trading 221 6.6%
 
Electronic Equipment 190 5.7%
 
Retail 158 4.7%
 
Banking 145 4.4%
 
Medical Equipment 138 4.1%
 
Communication 130 3.9%
 
Computers 108 3.2%
 
Insurance 84 2.5%
 
Other values (38) 902 27.1%
 
Max length40
Mean length15.38048048
Min length4
Contains charsTrue
Contains digitsFalse
Contains spacesTrue
Contains non-wordsTrue

industryFF5
Categorical

Distinct count5
Unique (%)0.2%
Missing (%)0.0%
Missing (n)0
Business Equipment, Telephone and Television Transmission
1122
Other
898
Healthcare, Medical Equipment, and Drugs
621
Other values (2)
689
ValueCountFrequency (%) 
Business Equipment, Telephone and Television Transmission 1122 33.7%
 
Other 898 27.0%
 
Healthcare, Medical Equipment, and Drugs 621 18.6%
 
Consumer Durables, NonDurables, Wholesale, Retail, and Some Services (Laundries, Repair Shops) 393 11.8%
 
Manufacturing, Energy, and Utilities 296 8.9%
 
Max length94
Mean length42.30690691
Min length5
Contains charsTrue
Contains digitsFalse
Contains spacesTrue
Contains non-wordsTrue

investmentReceived
Numeric

Distinct count1725
Unique (%)51.8%
Missing (%)45.0%
Missing (n)1500
Infinite (%)0.0%
Infinite (n)0
Mean171295.1371
Minimum-14574.7
Maximum37605000
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum-14574.7
5-th percentile5499.9
Q131198
Median70982.05
Q3146996
95-th percentile540129.845
Maximum37605000
Range37619574.7
Interquartile range115798

Descriptive statistics

Standard deviation928568.3849
Coef of variation5.420868336
Kurtosis1446.623104
Mean171295.1371
MAD173809.6285
Skewness36.1068583
Sum313470100.9
Variance8.622392454e+11
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
10000 8 0.2%
 
15000 6 0.2%
 
50000 6 0.2%
 
25000 6 0.2%
 
20000 6 0.2%
 
40000 5 0.2%
 
4000 4 0.1%
 
150000 4 0.1%
 
3000 3 0.1%
 
3500 3 0.1%
 
Other values (1714) 1779 53.4%
 
(Missing) 1500 45.0%
 

Minimum 5 values

ValueCountFrequency (%) 
-14574.7 1 < 0.1%
 
50 1 < 0.1%
 
100 1 < 0.1%
 
140 1 < 0.1%
 
150 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
37605000 1 < 0.1%
 
4654274.1 1 < 0.1%
 
4005520 1 < 0.1%
 
3882175 1 < 0.1%
 
3019984 1 < 0.1%
 

ipoSize
Highly correlated

This variable is highly correlated with amountOnProspectus and should be ignored for analysis

Correlation0.9926927282

issuer
Categorical, Unique

First 5 values
012 Smile.Communications Ltd
1-800 Contacts Inc
1-800-Flowers.com Inc
1347 Property Insurance Hldgs
21st Century Holding Co
Last 5 values
uBID Inc
uniQure BV
vTv Therapeutics Inc
webMethods Inc
zulily inc

First 5 values

ValueCountFrequency (%) 
012 Smile.Communications Ltd 1 < 0.1%
 
1-800 Contacts Inc 1 < 0.1%
 
1-800-Flowers.com Inc 1 < 0.1%
 
1347 Property Insurance Hldgs 1 < 0.1%
 
21st Century Holding Co 1 < 0.1%
 

Last 5 values

ValueCountFrequency (%) 
zulily inc 1 < 0.1%
 
webMethods Inc 1 < 0.1%
 
vTv Therapeutics Inc 1 < 0.1%
 
uniQure BV 1 < 0.1%
 
uBID Inc 1 < 0.1%
 

leverage
Numeric

Distinct count2318
Unique (%)69.6%
Missing (%)11.3%
Missing (n)376
Infinite (%)0.0%
Infinite (n)0
Mean0.195876729
Minimum0
Maximum3.18867121
Zeros (%)19.0%
Mini histogram

Quantile statistics

Minimum0
5-th percentile0
Q10.001835065222
Median0.07079009682
Q30.3300674044
95-th percentile0.7080074335
Maximum3.18867121
Range3.18867121
Interquartile range0.3282323391

Descriptive statistics

Standard deviation0.2665436701
Coef of variation1.36077252
Kurtosis11.13989757
Mean0.195876729
MAD0.2035492467
Skewness2.342995877
Sum578.6198575
Variance0.07104552806
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
0 633 19.0%
 
0.3492782096 4 0.1%
 
0.05549752582 2 0.1%
 
0.005779467681 2 0.1%
 
0.03178627145 1 < 0.1%
 
0.1809995475 1 < 0.1%
 
0.2588032093 1 < 0.1%
 
0.6026772454 1 < 0.1%
 
0.0960390804 1 < 0.1%
 
0.2543768717 1 < 0.1%
 
Other values (2307) 2307 69.3%
 
(Missing) 376 11.3%
 

Minimum 5 values

ValueCountFrequency (%) 
0 633 19.0%
 
7.207531871e-05 1 < 0.1%
 
8.657098512e-05 1 < 0.1%
 
9.279737693e-05 1 < 0.1%
 
0.0001145278589 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
3.18867121 1 < 0.1%
 
2.514579932 1 < 0.1%
 
2.177065486 1 < 0.1%
 
1.930307467 1 < 0.1%
 
1.745177681 1 < 0.1%
 

managementFee
Highly correlated

This variable is highly correlated with ipoSize and should be ignored for analysis

Correlation0.9167136414

manager
Categorical

Distinct count1487
Unique (%)44.7%
Missing (%)0.0%
Missing (n)0
Goldman Sachs & Co
 
126
Merrill Lynch & Co Inc
 
94
CS First Boston Corp
 
85
Other values (1484)
3025
ValueCountFrequency (%) 
Goldman Sachs & Co 126 3.8%
 
Merrill Lynch & Co Inc 94 2.8%
 
CS First Boston Corp 85 2.6%
 
Morgan Stanley Dean Witter & Co 73 2.2%
 
Donaldson Lufkin & Jenrette Inc 68 2.0%
 
Lehman Brothers 63 1.9%
 
Hambrecht & Quist Inc 45 1.4%
 
Bear Stearns & Co Inc 44 1.3%
 
Friedman Billings Ramsey Group 34 1.0%
 
BancBoston Robertson Stephens Inc 34 1.0%
 
Other values (1477) 2664 80.0%
 
Max length413
Mean length43.19189189
Min length4
Contains charsTrue
Contains digitsTrue
Contains spacesTrue
Contains non-wordsTrue

nasdaq2weeksBefore
Highly correlated

This variable is highly correlated with dj2weeksBefore and should be ignored for analysis

Correlation0.9299237865

netIncome
Numeric

Distinct count2878
Unique (%)86.4%
Missing (%)11.8%
Missing (n)392
Infinite (%)0.0%
Infinite (n)0
Mean0.8552797822
Minimum-4616
Maximum6172
Zeros (%)< 0.1%
Mini histogram

Quantile statistics

Minimum-4616
5-th percentile-82.17835
Q1-22.08
Median-1.0535
Q310.855
95-th percentile97.7448
Maximum6172
Range10788
Interquartile range32.935

Descriptive statistics

Standard deviation201.8411644
Coef of variation235.9943127
Kurtosis436.7384373
Mean0.8552797822
MAD49.52839668
Skewness5.178382772
Sum2512.812
Variance40739.85564
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
357 4 0.1%
 
0.546 2 0.1%
 
4.332 2 0.1%
 
-4.107 2 0.1%
 
-28.8 2 0.1%
 
0.447 2 0.1%
 
-27.59 2 0.1%
 
2.645 2 0.1%
 
7.272 2 0.1%
 
7.372 2 0.1%
 
Other values (2867) 2916 87.6%
 
(Missing) 392 11.8%
 

Minimum 5 values

ValueCountFrequency (%) 
-4616 1 < 0.1%
 
-3445.066 1 < 0.1%
 
-1497.5 1 < 0.1%
 
-1481 1 < 0.1%
 
-1179 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
6172 1 < 0.1%
 
2465 1 < 0.1%
 
2109 1 < 0.1%
 
1820 1 < 0.1%
 
1177 1 < 0.1%
 

nExecutives
Numeric

Distinct count45
Unique (%)1.4%
Missing (%)42.9%
Missing (n)1429
Infinite (%)0.0%
Infinite (n)0
Mean11.21778012
Minimum1
Maximum89
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum1
5-th percentile3
Q16
Median11
Q315
95-th percentile22
Maximum89
Range88
Interquartile range9

Descriptive statistics

Standard deviation6.626098282
Coef of variation0.5906782102
Kurtosis12.95767119
Mean11.21778012
MAD4.91980383
Skewness1.957182811
Sum21325
Variance43.90517844
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=45)
ValueCountFrequency (%) 
5 269 8.1%
 
12 136 4.1%
 
11 131 3.9%
 
13 125 3.8%
 
14 121 3.6%
 
10 115 3.5%
 
9 94 2.8%
 
8 90 2.7%
 
16 82 2.5%
 
15 82 2.5%
 
Other values (34) 656 19.7%
 
(Missing) 1429 42.9%
 

Minimum 5 values

ValueCountFrequency (%) 
1 38 1.1%
 
2 50 1.5%
 
3 42 1.3%
 
4 61 1.8%
 
5 269 8.1%
 

Maximum 5 values

ValueCountFrequency (%) 
89 1 < 0.1%
 
53 1 < 0.1%
 
52 1 < 0.1%
 
50 1 < 0.1%
 
48 1 < 0.1%
 

nPatents
Numeric

Distinct count92
Unique (%)2.8%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean5.376276276
Minimum0
Maximum2098
Zeros (%)74.8%
Mini histogram

Quantile statistics

Minimum0
5-th percentile0
Q10
Median0
Q31
95-th percentile18
Maximum2098
Range2098
Interquartile range1

Descriptive statistics

Standard deviation48.65286311
Coef of variation9.049546678
Kurtosis1100.331268
Mean5.376276276
MAD8.894594414
Skewness29.0217917
Sum17903
Variance2367.101089
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[0.000e+00 5.000e-01 1.500e+00 3.500e+00 9.500e+00 ... 4.850e+01 7.900e+01 1.315e+02 5.500e+02 2.098e+03], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
0 2491 74.8%
 
1 192 5.8%
 
2 95 2.9%
 
3 78 2.3%
 
5 42 1.3%
 
4 40 1.2%
 
6 37 1.1%
 
7 29 0.9%
 
9 27 0.8%
 
8 23 0.7%
 
Other values (82) 276 8.3%
 

Minimum 5 values

ValueCountFrequency (%) 
0 2491 74.8%
 
1 192 5.8%
 
2 95 2.9%
 
3 78 2.3%
 
4 40 1.2%
 

Maximum 5 values

ValueCountFrequency (%) 
2098 1 < 0.1%
 
892 1 < 0.1%
 
802 1 < 0.1%
 
601 1 < 0.1%
 
499 1 < 0.1%
 

nUnderwriters
Numeric

Distinct count55
Unique (%)1.7%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean10.42462462
Minimum1
Maximum83
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum1
5-th percentile2
Q14
Median7
Q315
95-th percentile27
Maximum83
Range82
Interquartile range11

Descriptive statistics

Standard deviation8.630869813
Coef of variation0.8279309926
Kurtosis4.84455363
Mean10.42462462
MAD6.6483442
Skewness1.768302383
Sum34714
Variance74.49191372
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[ 1. 2.5 3.5 4.5 5.5 ... 26.5 28.5 38.5 50.5 83. ], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
4 464 13.9%
 
5 314 9.4%
 
3 240 7.2%
 
6 238 7.1%
 
2 186 5.6%
 
7 176 5.3%
 
8 142 4.3%
 
9 125 3.8%
 
10 112 3.4%
 
13 103 3.1%
 
Other values (45) 1230 36.9%
 

Minimum 5 values

ValueCountFrequency (%) 
1 86 2.6%
 
2 186 5.6%
 
3 240 7.2%
 
4 464 13.9%
 
5 314 9.4%
 

Maximum 5 values

ValueCountFrequency (%) 
83 1 < 0.1%
 
72 1 < 0.1%
 
63 1 < 0.1%
 
58 1 < 0.1%
 
55 1 < 0.1%
 

nVCs
Numeric

Distinct count31
Unique (%)0.9%
Missing (%)39.9%
Missing (n)1329
Infinite (%)0.0%
Infinite (n)0
Mean7.274862569
Minimum1
Maximum32
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum1
5-th percentile1
Q13
Median6
Q310
95-th percentile18
Maximum32
Range31
Interquartile range7

Descriptive statistics

Standard deviation5.326388344
Coef of variation0.7321634318
Kurtosis1.06302519
Mean7.274862569
MAD4.267180752
Skewness1.050645801
Sum14557
Variance28.37041279
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=31)
ValueCountFrequency (%) 
1 216 6.5%
 
2 194 5.8%
 
3 192 5.8%
 
4 173 5.2%
 
5 134 4.0%
 
7 133 4.0%
 
6 127 3.8%
 
9 125 3.8%
 
8 125 3.8%
 
10 107 3.2%
 
Other values (20) 475 14.3%
 
(Missing) 1329 39.9%
 

Minimum 5 values

ValueCountFrequency (%) 
1 216 6.5%
 
2 194 5.8%
 
3 192 5.8%
 
4 173 5.2%
 
5 134 4.0%
 

Maximum 5 values

ValueCountFrequency (%) 
32 2 0.1%
 
31 1 < 0.1%
 
30 2 0.1%
 
28 1 < 0.1%
 
26 2 0.1%
 

offerPrice
Numeric

Distinct count117
Unique (%)3.5%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean14.44826126
Minimum1
Maximum97
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum1
5-th percentile6
Q110.5
Median14
Q317
95-th percentile24
Maximum97
Range96
Interquartile range6.5

Descriptive statistics

Standard deviation6.225451429
Coef of variation0.4308789353
Kurtosis26.92075874
Mean14.44826126
MAD4.300797549
Skewness3.031780348
Sum48112.71
Variance38.7562455
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[ 1. 3.75 4.125 4.875 5.094 ... 26.25 30.5 36.25 53. 97. ], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
15 271 8.1%
 
12 263 7.9%
 
14 229 6.9%
 
16 222 6.7%
 
10 205 6.2%
 
13 192 5.8%
 
17 173 5.2%
 
11 165 5.0%
 
18 163 4.9%
 
8 129 3.9%
 
Other values (107) 1318 39.6%
 

Minimum 5 values

ValueCountFrequency (%) 
1 1 < 0.1%
 
3.25 2 0.1%
 
3.5 1 < 0.1%
 
4 16 0.5%
 
4.25 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
97 1 < 0.1%
 
91 1 < 0.1%
 
85 1 < 0.1%
 
70.41 1 < 0.1%
 
65 1 < 0.1%
 

patRatio
Numeric

Distinct count799
Unique (%)24.0%
Missing (%)38.6%
Missing (n)1287
Infinite (%)0.0%
Infinite (n)0
Mean0.4454759403
Minimum0
Maximum2
Zeros (%)8.0%
Mini histogram

Quantile statistics

Minimum0
5-th percentile0
Q10.25243195
Median0.4444444444
Q30.6202039825
95-th percentile1
Maximum2
Range2
Interquartile range0.3677720325

Descriptive statistics

Standard deviation0.2851204543
Coef of variation0.6400355856
Kurtosis1.048845793
Mean0.4454759403
MAD0.2233515281
Skewness0.4538845919
Sum910.1073459
Variance0.08129367345
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
0 266 8.0%
 
0.5 134 4.0%
 
1 125 3.8%
 
0.3333333333 56 1.7%
 
0.6666666667 51 1.5%
 
0.25 31 0.9%
 
0.4 27 0.8%
 
0.6 20 0.6%
 
0.4444444444 19 0.6%
 
0.2857142857 18 0.5%
 
Other values (788) 1296 38.9%
 
(Missing) 1287 38.6%
 

Minimum 5 values

ValueCountFrequency (%) 
0 266 8.0%
 
0.02608695652 1 < 0.1%
 
0.03846153846 1 < 0.1%
 
0.04761904762 1 < 0.1%
 
0.05263157895 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
2 4 0.1%
 
1.666666667 1 < 0.1%
 
1.2 1 < 0.1%
 
1.090909091 1 < 0.1%
 
1.03125 1 < 0.1%
 

pe
Boolean

Distinct count2
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
False
2650
True
680
ValueCountFrequency (%) 
False 2650 79.6%
 
True 680 20.4%
 

priorFinancing
Numeric

Distinct count1706
Unique (%)51.2%
Missing (%)42.6%
Missing (n)1417
Infinite (%)0.0%
Infinite (n)0
Mean128733.6259
Minimum0
Maximum5081687
Zeros (%)3.4%
Mini histogram

Quantile statistics

Minimum0
5-th percentile0
Q123800.1
Median62036
Q3133861.8
95-th percentile437296.4
Maximum5081687
Range5081687
Interquartile range110061.7

Descriptive statistics

Standard deviation265960.3259
Coef of variation2.065974014
Kurtosis121.7197935
Mean128733.6259
MAD120350.6287
Skewness8.766243918
Sum246267426.4
Variance7.073489496e+10
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
0 113 3.4%
 
10000 8 0.2%
 
20000 6 0.2%
 
25000 6 0.2%
 
15000 5 0.2%
 
50000 5 0.2%
 
4000 4 0.1%
 
40000 4 0.1%
 
65000 4 0.1%
 
5000 4 0.1%
 
Other values (1695) 1754 52.7%
 
(Missing) 1417 42.6%
 

Minimum 5 values

ValueCountFrequency (%) 
0 113 3.4%
 
50 1 < 0.1%
 
100 1 < 0.1%
 
140 1 < 0.1%
 
150 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
5081687 1 < 0.1%
 
4654274.1 1 < 0.1%
 
2423771.6 1 < 0.1%
 
2313000 1 < 0.1%
 
2300000 1 < 0.1%
 

prominence
Boolean

Distinct count2
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
0
2386
1
944
ValueCountFrequency (%) 
0 2386 71.7%
 
1 944 28.3%
 

reputationAvg
Numeric

Distinct count2034
Unique (%)61.1%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean5.56139949
Minimum0
Maximum12.00133333
Zeros (%)1.3%
Mini histogram

Quantile statistics

Minimum0
5-th percentile2.12525
Q14.333916667
Median5.992472222
Q36.860875882
95-th percentile8.205216667
Maximum12.00133333
Range12.00133333
Interquartile range2.526959216

Descriptive statistics

Standard deviation1.883080978
Coef of variation0.3385984016
Kurtosis0.1807721954
Mean5.56139949
MAD1.516280313
Skewness-0.5092016474
Sum18519.4603
Variance3.54599397
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[ 0. 0.32146429 1.00025 1.00075 1.50020833 ... 6.80075 6.80096667 6.85814286 6.85814286 12.00133333], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
0 44 1.3%
 
7.001 34 1.0%
 
3.5005 29 0.9%
 
3.001 28 0.8%
 
8.001 28 0.8%
 
5.25075 23 0.7%
 
7.251 20 0.6%
 
4.0005 18 0.5%
 
6.001 16 0.5%
 
3.2505 16 0.5%
 
Other values (2024) 3074 92.3%
 

Minimum 5 values

ValueCountFrequency (%) 
0 44 1.3%
 
0.6429285714 1 < 0.1%
 
0.667 2 0.1%
 
0.75025 1 < 0.1%
 
0.8335 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
12.00133333 1 < 0.1%
 
11.668 1 < 0.1%
 
11.25125 1 < 0.1%
 
11.00125 5 0.2%
 
10.75125 1 < 0.1%
 

reputationLeadAvg
Numeric

Distinct count183
Unique (%)5.5%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean6.803184849
Minimum0
Maximum9.001
Zeros (%)6.9%
Mini histogram

Quantile statistics

Minimum0
5-th percentile0
Q15.750666667
Median8
Q39
95-th percentile9.001
Maximum9.001
Range9.001
Interquartile range3.249333333

Descriptive statistics

Standard deviation2.559349271
Coef of variation0.3761986963
Kurtosis1.082484501
Mean6.803184849
MAD2.001956801
Skewness-1.369782885
Sum22654.60555
Variance6.550268691
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
Histogram
Histogram with variable size bins (bins=[0. 0.5005 2.0005 2.2505 2.50025 ... 8.87525 8.93775 9.00025 9.00075 9.001 ], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
9.001 777 23.3%
 
8.001 331 9.9%
 
0 230 6.9%
 
7.001 190 5.7%
 
8.501 138 4.1%
 
8.75 130 3.9%
 
5.001 107 3.2%
 
6.001 99 3.0%
 
9 88 2.6%
 
3.001 85 2.6%
 
Other values (173) 1155 34.7%
 

Minimum 5 values

ValueCountFrequency (%) 
0 230 6.9%
 
1.001 7 0.2%
 
1.5 1 < 0.1%
 
1.501 2 0.1%
 
2 3 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
9.001 777 23.3%
 
9.0005 6 0.2%
 
9 88 2.6%
 
8.8755 6 0.2%
 
8.875 27 0.8%
 

reputationLeadMax
Numeric

Distinct count44
Unique (%)1.3%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean7.403908108
Minimum0
Maximum9.001
Zeros (%)6.9%
Mini histogram

Quantile statistics

Minimum0
5-th percentile0
Q17.001
Median8.75
Q39.001
95-th percentile9.001
Maximum9.001
Range9.001
Interquartile range2

Descriptive statistics

Standard deviation2.56569386
Coef of variation0.3465323749
Kurtosis2.482485605
Mean7.403908108
MAD1.877977427
Skewness-1.878679312
Sum24655.014
Variance6.582784983
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=44)
Histogram
Histogram with variable size bins (bins=[0. 0.5005 2.0005 2.2505 2.7505 ... 8.6875 8.8125 8.9375 9.0005 9.001 ], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
9.001 1470 44.1%
 
8.001 412 12.4%
 
7.001 244 7.3%
 
0 230 6.9%
 
8.75 136 4.1%
 
5.001 113 3.4%
 
9 91 2.7%
 
6.001 89 2.7%
 
3.001 85 2.6%
 
8.501 77 2.3%
 
Other values (34) 383 11.5%
 

Minimum 5 values

ValueCountFrequency (%) 
0 230 6.9%
 
1.001 7 0.2%
 
1.5 1 < 0.1%
 
2 3 0.1%
 
2.001 33 1.0%
 

Maximum 5 values

ValueCountFrequency (%) 
9.001 1470 44.1%
 
9 91 2.7%
 
8.875 45 1.4%
 
8.75 136 4.1%
 
8.625 6 0.2%
 

reputationSum
Highly correlated

This variable is highly correlated with nUnderwriters and should be ignored for analysis

Correlation0.9577851468

rf
Categorical

Distinct count3058
Unique (%)91.8%
Missing (%)8.2%
Missing (n)273
RISK FACTORS You should carefully consider the risks described below before making a decision to invest in our common stock. RISKS RELATED TO OUR BUSINESS AND FINANCIAL PERFORMANCE OUR LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO VALUE AND EVALUATE OUR BUSINESS AND OUR FUTURE PROSPECTS We commenced operations in September 1997 and commercially released our first product in the first quarter of 1999. Your evaluation of the risks and uncertainties of our business will be difficult because of our limited operating history. In addition, our limited operating history means that we have less insight into how technological and market trends may affect our business. The revenue and income potential of our business and market are unproven. You must consider our business and prospects in light of the risks and difficulties typically encountered by companies in their early stages of development, particularly those in new, rapidly evolving and highly competitive markets such as the market for broadband access solutions WE HAVE INCURRED SUBSTANTIAL LOSSES TO DATE AND MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABILITY, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE Since we began operations, we have incurred net losses in every fiscal period. We incurred a net loss of $9.1 million in the first six months of 2000 and our accumulated deficit through June 30, 2000 was $25.6 million. We expect to incur net losses in the future. Our operating losses have been due in part to the commitment of significant resources to our research and development and sales and marketing organizations. We expect our expenses to continue to increase in an effort to develop our business and, as a result, we will need to generate significant revenue to achieve profitability. We cannot be certain if or when we will become profitable. Our failure to become profitable within the timeframe expected by investors may adversely affect the market price of our common stockUNEXPECTED FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE Our operating results are difficult to forecast and may fluctuate significantly from quarter to quarter. As a result of our limited operating history, we do not have historical financial data for a significant number of periods upon which to forecast quarterly financial performance. It is likely that in some future quarters, our operating results may fall below the expectations of investors or securities analysts, which could cause the price of our common stock to fall substantiallyIF WE FAIL TO INCREASE OUR REVENUE, OR IF WE EXPERIENCE DELAYS IN GENERATING REVENUE, WE WILL CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES We plan to significantly increase our operating expense to fund greater levels of research and development, expand our sales and marketing operations, broaden our customer support capabilities and develop new distribution channels. We also plan to expand our general and administrative capabilities to address the demands resulting from this offering and the continued growth of our business. Our operating expenses are largely based on anticipated personnel requirements and revenue trends, and a high percentage of our expenses are, and will continue to be, fixed. In addition, we may be required to spend more in research and development than originally budgeted in order to respond to industry trends. As a result, if we fail to increase our revenue, or if we experience delays in generating revenue, we will continue to incur substantial operating lossesTHERE IS INTENSE COMPETITION IN THE MARKET FOR BROADBAND ACCESS SOLUTIONS AND IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUE COULD DECLINE AND WE COULD EXPERIENCE ADDITIONAL LOSSES The market for broadband access solutions is new, rapidly evolving and very competitive. We expect competition in this market to increase as a result of a number of factors, including the entrance of new or larger competitors and the introduction of new products or technologies. This competition could, among other things: - divert sales from us; - force us to charge lower prices; and 5 8 - adversely affect our strategic relationships with manufacturers, resellers and others. If any of these risks occurred, our revenues could decline, our gross margins could decrease, our expenses could increase and we could experience additional losses. Our principal competitors may be different depending on the market we target, and include large networking equipment companies such as Alcatel, Cisco Systems, Lucent Technologies, Marconi(Fore) and Nortel Networks, as well as companies such as Accelerated Networks, ADC Kentrox, and Tiara NetworksMany of our current and potential competitors are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, competitors with large market capitalization or cash reserves are much better positioned than we are to acquire other companies, including our competitors, and thereby acquire new technologies or products that may displace our product linesWE PURCHASE SEVERAL OF OUR KEY COMPONENTS FROM SINGLE SOURCES, AND WE COULD LOSE REVENUE AND MARKET SHARE IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF THOSE COMPONENTS Several key components of our products are currently available from single or limited sources with whom we have no guaranteed supply agreements, including: - programmable chips supplied by Lucent Technologies; - asynchronous transfer mode, or ATM, chips supplied by Conexant Systems Inc.; and - circuit emulation chips supplied by PMC-Sierra, Inc. If we are unable to obtain a sufficient supply of these or other critical components from our current vendors: - we may be unable to manufacture and ship our products on a timely basis, which could result in lost or delayed revenue, harm to our reputation, increased manufacturing costs and exposure to claims by our customers; and - we may be forced either to develop alternative sources of supply or to modify the design of our products to use more readily available components, which may take a long time and may involve significant additional expense. For example, during the first quarter of 2000, we encountered delays in receiving programmable chips used in our A-1240 product, which resulted in production delays. In addition, our vendors may increase their prices for these components. Accordingly, the lack of alternative sources for these components may also force us to pay higher prices for these components, which would cause our gross margins to decreaseWE ARE ENTIRELY DEPENDENT ON OUR LINE OF BROADBAND ACCESS PLATFORM PRODUCTS AND OUR PRODUCTS MAY NOT BE READILY ACCEPTED Widespread commercial acceptance of our products is critical to our future success. To date, our A-1000, A-2000, A-1240, A-3010 and A-4000 products are the only products that we have sold and we expect that revenue from these products will account for a substantial portion of our revenue for the foreseeable future. We intend to develop and introduce new products and enhancements to existing products in the future. If our target customers do not adopt, purchase and successfully deploy our current and planned products, our revenue will not grow significantly. The acceptance of our products may be hindered by: - the failure of prospective customers to recognize the value of broadband access platform products; - the reluctance of our prospective customers to replace or expand their current access equipment, which may be supplied by more established vendors, with our products; and - the emergence of new technologies or industry standards that could cause our products to be less competitive or become obsolete. 6 9 BECAUSE MOST OF OUR SALES ARE MADE UNDER SHORT-TERM PURCHASE ORDERS, WE MAY EXPEND SIGNIFICANT RESOURCES AND BE UNABLE TO RECOVER THE COSTS IF OUR CUSTOMERS FAIL TO PURCHASE ADDITIONAL PRODUCTS Our contracts and purchase orders are separately negotiated with each of our customers and the terms may vary widely. A majority of our sales are made under short-term purchase orders for one or a few of our products at one time instead of long-term contracts for large scale deployment of our products. These purchase orders do not ensure that they will purchase any additional products other than those specifically listed in the order. Moreover, since we believe that these purchase orders represent the early portion of longer term customer programs, we expend significant financial and personnel resources and expand our operations to be able to fulfill these programs. If our customers fail to purchase additional products to expand their programs as we expect, we may be unable to recover the costs we incurredOUR CUSTOMER CONTRACTS ALLOW OUR CUSTOMERS TO TERMINATE WITHOUT SIGNIFICANT PENALTIES Our contracts are generally non-exclusive and contain provisions allowing our customers to terminate them without significant penalties. Our contracts also may specify the achievement of shipment, delivery and installation commitments. We are generally able to meet these commitments or negotiate extensions with our customers. However, if we fail to meet these commitments in a timely manner, our customers may choose to terminate their contracts with us or impose monetary penalties. If our customers elect to terminate their contracts with us, our future revenues would be reducedWE DEPEND UPON A SINGLE CONTRACT MANUFACTURER TO MANUFACTURE SUBSTANTIALLY ALL OF OUR PRODUCTS. IF THAT MANUFACTURER IS UNABLE OR UNWILLING TO MANUFACTURE A SUFFICIENT QUANTITY OF OUR PRODUCTS, OUR REVENUE MAY DECLINE AND OUR CUSTOMER RELATIONSHIPS MAY BE DAMAGED We currently subcontract the manufacturing and testing of substantially all of our products to Benchmark Electronics, an independent manufacturer with whom we have no long-term agreement. Our reliance on a single manufacturer exposes us to a number of risks, including reduced control over manufacturing capacity, product completion and delivery times, product quality and manufacturing costs. If, as we anticipate, we experience increased demand for our products and introduce new products and product enhancements, the challenges we face in managing our relationship with Benchmark will be increased. If Benchmark is unable or unwilling to manufacture a sufficient quantity of products for us, on the time schedules and with the quality that we demand: - we may not be able to fulfill customer orders on a timely basis; and - we may be forced to engage additional or replacement manufacturers, which is expensive and time consuming. If that occurs, our revenue may decline and our customer relationships may be damagedIF WE FAIL TO PREDICT OUR MANUFACTURING AND COMPONENT REQUIREMENTS ACCURATELY, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS We provide forecasts of our demand to our contract manufacturer and component vendors up to six months prior to scheduled delivery of products to our customers. If we overestimate our requirements, we may have excess inventory, which could increase our costs and harm our relationships with our contract manufacturer and component vendors by reducing our future orders. If we underestimate our requirements, we may have an inadequate inventory of components. Inadequate inventory could interrupt manufacturing of our products and result in delays in shipments. In addition, lead times for materials and components that we order are long and depend on factors such as the procedures of, or contract terms with, a specific supplier and demand for each component at a given time. In the case of some components in short supply, component vendors have imposed strict allocations that limit the number of these components they will supply to a given customer in a specified time period. These vendors may choose to increase allocations to larger, more established companies, which could reduce our allocations and harm our ability to manufacture our productsDUE TO THE LONG AND UNPREDICTABLE SALES CYCLE FOR OUR PRODUCTS, THE TIMING OF REVENUE IS DIFFICULT TO PREDICT AND MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE UNEXPECTEDLY The sales and deployment cycle for our products is lengthy and varies substantially from customer to customer; it may extend for six months or more. The length of our sales cycle may cause our revenue and 7 10 operating results to vary unexpectedly from quarter to quarter. A customer's decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process. Consequently, we may incur substantial expenses and devote senior management attention to potential relationships that never materialize, in which event our investments will largely be lost and we may miss other opportunitiesBECAUSE WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A LIMITED NUMBER OF CUSTOMERS, ANY LOSS OF OR DELAY IN RECEIVING REVENUE FROM THOSE CUSTOMERS COULD SIGNIFICANTLY DAMAGE OUR FINANCIAL PERFORMANCE We have historically derived a significant portion of our revenue from a relatively small number of customers. If any of these customers stop or delay purchasing products or services from us, our financial performance would be negatively impacted. For the year ended December 31, 1999, 2nd Century Communications and AccessLan accounted for 22% and 53% of our revenue. These same customers accounted for 11% and 10% of our revenue for the six months ended June 30, 2000. One additional customer, Broadband Office, accounted for 53% of our revenue for the six months ended June 30, 2000. Most of our customers are not contractually obligated to purchase future products or services from us, and they may discontinue doing so at any time. In addition, although our largest customers will probably vary from period to period, we anticipate that a small number of customers will continue to represent a large percentage of our revenue in any given fiscal period. Accordingly, the failure to obtain a significant order from a customer within the fiscal period expected by us could have a significant adverse effect on our financial performance for that fiscal periodWE ANTICIPATE THAT THE AVERAGE SELLING PRICES OF OUR PRODUCTS WILL DECLINE, WHICH COULD REDUCE OUR GROSS MARGINS AND REVENUE Our industry has experienced rapid erosion of average product selling prices. We anticipate that the average selling prices of our products will decline in response to competitive pressures, increased sales discounts, new product introductions by our competitors or other factors. We are seeking to improve our product design to reduce our costs and increase our sales. If we are unable to do so, declines in average selling prices will reduce our gross margins and revenueIF NETWORK SERVICE PROVIDERS CHOOSE A PROTOCOL OTHER THAN ATM FOR THEIR CORE NETWORKS AND WE ARE NOT ABLE TO ADAPT TO THE CHANGE, OUR TARGET MARKET COULD BE REDUCED While we have designed a product that is adaptable to many communications protocols, our initial architecture is based on an ATM infrastructure. In the service providers' networks ATM competes with other protocols such as time division multiplexing (TDM) and Internet protocol (IP). We believe that an eventual migration to an IP-based protocol is possible. To the extent that network service providers choose a protocol other than ATM for their core networks, we may not be able to react in time or adapt to the change and our target market could be substantially reducedIF WE ARE NOT SUCCESSFUL IN DEVELOPING AND MARKETING, OR IF WE ARE DELAYED IN INTRODUCING, NEW AND ENHANCED PRODUCTS AND FEATURES THAT KEEP PACE WITH TECHNOLOGY AND OUR CUSTOMERS' NEEDS AND EXPECTATIONS, OUR SALES AND COMPETITIVE POSITION WILL SUFFER The market for broadband access solutions is characterized by rapidly changing technologies, frequent new product introductions and evolving customer requirements and industry standards. In order to remain competitive, we will need to introduce on a timely basis new products or product enhancements that offer significantly improved performance and features, at lower prices, and we may not be successful in doing so. Some prior versions of our products were released behind schedule, and this may happen again in the future. Delays in introducing new products and features, or the introduction of new products which do not meet the evolving demands of our customers, could damage our reputation and cause a loss of or delay in revenueIF WE DO NOT EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, WE MAY BE UNABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS, WHICH MAY PREVENT US FROM ACHIEVING AND MAINTAINING PROFITABILITY Our products and services require a technical sales effort targeted at several key people within each of our prospective customers' organizations. Our sales efforts require the attention of sales personnel and specialized system engineers with extensive experience in networking technologies. Competition for these individuals is 8 11 intense, and we may not be able to hire sufficient numbers of qualified sales personnel and specialized system engineers. We also plan to expand our relationships with resellers and original equipment manufacturers. If we fail to develop or cultivate relationships with significant resellers or original equipment manufacturers, or if these resellers and original equipment manufacturers are not successful in their sales efforts, our business may be harmed. Many of our resellers also sell our competitors' products. Failure to expand these channels could adversely affect our revenues and operating resultsIF WE DO NOT EXPAND OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION, WE MAY BE UNABLE TO INCREASE OUR SALES In response to our growing base of product installations, we will need to increase our customer service and support organization to support new and existing customers. We generally do not enter into service contracts as part of our sales process, and our products have not required extensive servicing to date. However, as our product base continues to expand, we intend to offer an enhanced level of customer support on a post-product sale basis both to generate additional revenue opportunities and to distinguish us from our competitors. Our products are complex and require highly-trained customer service and support personnel. Hiring customer service and support personnel is difficult in our industry due to the limited number of people available with the necessary technical skills. If we are unable to expand our customer service and support organization and train our personnel rapidly, we may not be able to increase salesIF WE ARE NOT ABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL, OR IF WE LOSE KEY PERSONNEL, WE MAY BE UNABLE TO MANAGE OR GROW OUR BUSINESS The growth of our business and revenue depends in large part upon our ability to attract and retain sufficient numbers of highly skilled employees, particularly qualified sales and engineering personnel. Qualified personnel are in great demand throughout our industry, particularly in the Washington, D.C. metropolitan area. We may not be successful in hiring and retaining the skilled personnel that we needOur future success also depends to a significant degree on the skills and efforts of Asghar Mostafa, our co-founder, Chairman of the Board and Chief Executive Officer, and on the ability of our other executive officers and members of senior management to work effectively as a team. The loss of the services of Mr. Mostafa or one or more of our other executive officers or senior management members could have a material adverse effect on our financial performance and ability to competeOUR COMPANY IS GROWING RAPIDLY AND WE MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH COULD RESULT IN LOST SALES OR DISRUPTIONS TO OUR BUSINESS Our failure to effectively manage our recent and anticipated growth could have a material adverse effect on the quality of our products, our ability to retain key personnel and our financial performance. From June 30, 1999 to June 30, 2000, the number of our employees increased from 50 to 122. In addition, the proceeds of this offering will be used in part to further expand our operations and increase the number of our employees. This growth has strained, and may further strain, our management, operational systems and other resources. To manage our growth effectively, we must be able to enhance our financial and accounting systems and controls, integrate new personnel and manage expanded operations. We may not be able to do soWE ARE BEGINNING TO EXPAND OUR INTERNATIONAL BUSINESS, WHICH EXPOSES US TO ADDITIONAL RISKS THAT WE DO NOT FACE IN OUR U.S. BUSINESS In 1999, we derived approximately 10% of our revenue from sales outside the United States, and we expect that percentage to increase as our business grows. An expanded international business exposes us to a number of risks that we do not have to address in our U.S. operations. These risks include: - longer sales cycles; - challenges and costs inherent in managing geographically dispersed operations; - protectionist laws and business practices that favor local competitors; - difficulties in finding and managing local resellers; - diverse and changing governmental laws and regulations, including greater regulation of the telecommunications industry; and 9 12 - foreign currency exchange rate fluctuationsIf we are unsuccessful in addressing these risks, our international business will not achieve the revenue or profits we expect IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS, WE MAY LOSE SALES AND INCUR ADDITIONAL EXPENSES Our success depends in part on both the adoption of industry standards for technologies in the broadband access solutions market and our products' compliance with those industry standards as different standards emerge, evolve and achieve acceptance. The absence of industry standards for a particular technology may prevent widespread adoption of products based on that technology. In addition, because many technological developments occur prior to the adoption of related industry standards, we may develop products that do not comply with the industry standards that are eventually adopted, which would hinder our ability to sell those products. Moreover, if a competitor obtains a leadership position in selling broadband access products, that competitor may have the ability to establish de facto standards within the industryIF OUR PRODUCTS CONTAIN DEFECTS OR FAIL TO PERFORM PROPERLY OR WORK EFFECTIVELY WITH OUR CUSTOMERS' NETWORKS, WE COULD LOSE REVENUE AND INCUR DAMAGE TO OUR REPUTATION AND LIABILITY TO OUR CUSTOMERS Our products must work effectively with our customers' existing networks, which typically include products from a variety of different vendors and utilize multiple protocol standards. The complexity of these networks makes it difficult for us to ensure that our products will function properly within these networks and also makes it difficult for us to identify the source of any problems which occur in the operation of our products. Despite testing by us and our customers, our products may contain undetected software or hardware errors which result in product failures or poor product performance. We have experienced such errors in the past in connection with new products and product upgrades. We expect that such errors will be found from time to time in new or enhanced products after we have already shipped the products. If our products contain defects or fail to work properly, we may: - suffer a loss of or delay in revenue; - incur additional expenses in our efforts to identify and remedy the problems; - suffer damage to our reputation; and - be exposed to damage claims by our customersCLAIMS BY NORTEL NETWORKS OR OTHER COMPANIES THAT WE ARE INFRINGING THEIR PROPRIETARY RIGHTS COULD HINDER OR BLOCK OUR ABILITY TO SELL OUR PRODUCTS, SUBJECT US TO SIGNIFICANT MONETARY LIABILITY AND DIVERT THE TIME AND ATTENTION OF OUR MANAGEMENT The broadband access equipment industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the data communications and networking markets have extensive patent portfolios with respect to networking technology. We recently received a letter from Nortel Networks Corporation alleging that a specific feature of our products infringes one of Nortel's patents relating to inverse multiplexing over ATM. We believe that our products do not infringe the relevant Nortel patent and we intend to contest this claim vigorously. However, we cannot assure you that we will prevail in our objection to this claim or any other claim Nortel may make with respect to other patents it owns, nor can we assure you that this dispute will not result in litigation or that an adverse result or judgment will not adversely affect our financial condition. The Nortel claim could be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop non-infringing technology. If Nortel succeeds in its claim, we would need to enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at allWe expect that we may increasingly be subject to infringement claims as the numbers of products and competitors in the market for broadband access equipment grows and the functionality of products overlaps. If there is a successful claim of infringement or if we fail to develop non-infringing technology or license proprietary rights on a timely basis that may become necessary, our ability to use technologies, products, and brand names may be limited and our business may be harmed. 10 13 OUR COMPETITIVE POSITION WOULD BE ADVERSELY AFFECTED IF WE WERE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS Our success and competitiveness are dependent to a significant degree on the protection of our proprietary rights. We rely primarily on a combination of copyrights, trademarks, trade secret laws and contractual restrictions and, to a lesser extent, on patents to protect our proprietary rights. We have one U.S. patent, and we have filed a corresponding application under the Patent Cooperation Treaty relating to the management of tunneling protocols. There can be no assurance that these patent applications will be approved, that any issued patents will protect our intellectual property or that third parties will not challenge them. We enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite these precautions, we cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. Others may be able to copy or reverse engineer aspects of our products, to obtain and use information that we regard as proprietary or to independently develop similar technology. If we are unable to protect our trademarks and other proprietary rights against unauthorized use by others, our reputation and brand name may be damaged and our competitive position may be significantly harmedIF WE MAKE ACQUISITIONS OR STRATEGIC INVESTMENTS, OUR STOCKHOLDERS COULD BE DILUTED, WE COULD INCUR ADDITIONAL DEBT, AND WE COULD ASSUME ADDITIONAL CONTINGENT LIABILITIES We intend to consider investments in complementary companies, products or technologies. While we have no current agreements to do so, we may buy businesses, products or technologies in the future. If we make an acquisition or investment, we may: - issue stock that would dilute your stock ownership; - incur debt which would restrict our cash flow; - assume liabilities which may result in additional costs; - incur amortization expenses related to goodwill and other intangible assets; or - incur large and immediate write-offsWE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OR MANAGE THE ACQUISITIONS OR INVESTMENTS WE MAKE We have not completed any acquisitions or investments to date, so, as a company, we have no experience in this area. Therefore, acquisitions or investments made by us could involve numerous risks, including: - problems combining the purchased operations, technologies or products; - unanticipated costs; - diversion of management's attention from our core business; - adverse effects on existing business relationships with suppliers and customers; - risks associated with entering markets in which we have no or limited prior experience; and - potential loss of key employees, particularly those of the purchased organizationsWe may not be able to successfully integrate businesses, products, technologies or personnel that we might acquire in the future. Any failure to do so could disrupt our business and seriously harm our financial condition WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WHICH MAY NOT BE AVAILABLE At June 30, 2000, we had approximately $25.5 million in cash, cash equivalents and marketable securities. We believe that these amounts, combined with proceeds from this offering and cash anticipated to be available from future operations, will enable us to meet our working capital and capital expenditure requirements for at least the next 12 months. However, if cash from available sources is insufficient, or if cash is used to acquire complementary companies, products or technologies, or for other uses not presently planned, we may need additional capital. The development and marketing of new and enhanced products and the expansion of our sales channels and associated support personnel will require a significant commitment of 11 14 resources. In addition, if the market for broadband access solutions develops at a slower pace than anticipated or if we fail to establish significant market share and achieve a meaningful level of revenue, we may continue to incur significant operating losses and utilize significant amounts of capital. As a result, we could be required to raise substantial additional capital. Additional capital may not be available to us at all, or if available, may be available only on unfavorable terms. Any inability to raise additional capital when we require it would materially adversely affect our business, results of operations and financial condition. RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING STOCK MARKET VOLATILITY HAS INCREASED, MAKING YOUR INVESTMENT MORE RISKY The price at which our common stock will trade following this offering is likely to be highly volatile and may fluctuate substantially. The price of the common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control. In particular, given the limited amount of our product sales and our limited number of customers, the announcement of any significant customer developments, awards or losses or of any significant partnerships or acquisitions by us or our competitors could have a material adverse effect on our stock price. In addition, the stock markets, particularly the Nasdaq National Market, on which we expect our common stock to be listed, have experienced extreme price and volume fluctuations. These fluctuations have particularly affected the market prices of equity securities of technology related companies and have often been unrelated or disproportionate to the operating performance of those companiesTHE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE ACTIONS Immediately following this offering, our executive officers, directors and their affiliates will together own approximately 71% of our outstanding common stock. As a result, those stockholders, if they act together, will be able to determine the outcome of the vote on any matter requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stockSOME PROVISIONS OF OUR CHARTER AND BY-LAWS MAY DELAY OR PREVENT TRANSA
 
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RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be carefully considered in evaluating the Company and its business before purchasing any of the shares of Common Stock offered hereby. The Company cautions the reader that this list of risk factors may not be exhaustive. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated by such forward-looking statements as a result of certain factors, including the factors set forth below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus DEPENDENCE ON ACQUISITIONS OF ADDITIONAL RESORT UNITS FOR GROWTH; NEED FOR ADDITIONAL CAPITAL The Company purchases or develops resort units for WorldMark in exchange for the exclusive right to sell the Vacation Credits assigned to these unitsThe Company can only sell additional Vacation Credits to the extent that it acquires or develops additional resort units for WorldMark. The Company's future growth and financial success therefore will depend to a significant degree on the availability of attractive resort locations and the Company's ability to acquire and develop additional resort units on favorable terms and to obtain additional debt and equity capital to fund such acquisitions and developmentThere can be no assurance that the Company will be successful in this regard. As of June 30, 1997, the Company had purchase agreements and developments in progress to obtain 351 additional resort units by the end of 1998. No assurance can be given that all of such units will be acquired or completed on a timely basis or at all. There are numerous potential buyers of resort real estate competing to acquire resort properties which the Company may consider attractive resort acquisition opportunities, and many of these potential buyers are better capitalized than the Company. There can be no assurance that the Company will be able to compete against such other buyers successfully. When the Company purchases or develops a new resort or additional units at an existing WorldMark Resort, the Company causes the units to be conveyed directly to WorldMark free of any monetary encumbrances, and therefore must purchase its properties without any financing secured by the properties. Since the Company generally finances at least 85% of the aggregate purchase price of Vacation Credits sold to new Owners, it does not generate sufficient cash from sales to provide the necessary capital to acquire or develop additional resort units. Accordingly, the Company has a continuous need for capital to purchase additional resort units. Historically, the Company's primary source of capital has been the sale of Notes Receivable to a group of banks and a securitization, through one of the Finance Subsidiaries, of Notes Receivable to institutional investors. Effective June 30, 1997, Jeld-Wen transferred the ownership of the Finance Subsidiaries to the Company in exchange for 5,193,693 shares of the Company's Common Stock. See "Summary -- Corporate Background and Consolidation of Finance Subsidiaries." The Finance Subsidiaries' relationship with the participating banks is expected to continue following the Consolidation Transactions. No assurance can be given, however, that the Company will be able to obtain adequate debt or equity capital through the sale or securitization of its Notes Receivables, or otherwise, in order to continue to acquire additional properties or that such future financing can be obtained on terms favorable to the Company. See "Business -- Finance Subsidiaries" and "Certain Transactions -- Acquisition of Finance Subsidiaries." RISKS ASSOCIATED WITH DEVELOPMENT AND CONSTRUCTION ACTIVITIES The Company intends to expand its acquisition, development, construction and expansion of timeshare resorts. There can be no assurance that the Company will complete current or future development or expansion projects. Risks associated with these activities include the risks that (i) acquisition or development opportunities may be abandoned; (ii) construction costs may exceed original estimates, possibly making the development or expansion uneconomical or unprofitable; (iii) financing may not be available on favorable terms or at all; and (iv) construction may not be completed on schedule, resulting in increased interest expense and delays in the availability for sale of Vacation CreditsDevelopment activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, the ability of the Company to 10 11 coordinate construction activities with the process of obtaining such permits and authorizations, and the ability of the Company to obtain the financing necessary to complete the necessary acquisition, construction and conversion work. In addition, the Company's construction activities are generally performed by third-party contractors. These third-party contractors generally control the timing, quality and completion of the construction activities. Nevertheless, construction claims may be asserted against the Company for construction defects and such claims may give rise to liabilities. New development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. The ability of the Company to expand its business to include new resorts will in part depend upon the availability of suitable properties at reasonable prices and the availability of financing for the acquisition and development of such properties. In the future, the Company may undertake the development of larger resort complexes. No assurance can be given that any such larger resort complexes will be developed in a profitable manner, if at allFACTORS AFFECTING SALES VOLUME As the number of potential customers in the geographic area of a sales office who have attended a sales presentation increases, the Company may have increasing difficulty in attracting additional potential customers to a sales presentation at that office and it may become increasingly difficult for the Company to maintain current sales levels at its existing sales officesAccordingly, the Company anticipates that a substantial portion of its future sales growth will depend on the opening of additional off-site sales offices The Company intends to open an additional off-site sales office in California in late 1997. No assurance can be given, however, that sales from existing or new off-site sales offices will meet management's expectations. If the Company does not open additional sales offices or if existing or new sales offices do not perform as expected, the Company's business, results of operations and financial condition could be materially adversely affectedGEOGRAPHIC CONCENTRATION ON WEST COAST The Company presently sells Vacation Credits in Washington, Oregon and California, primarily to residents of those states and of British Columbia. The Company intends to continue to sell Vacation Credits in these three states and to increase the number of its off-site sales offices in California. Since all of the Company's sales offices are in the western United States, any economic downturn in this area of the country could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the appeal of becoming an Owner may decrease if residents of Washington, Oregon, California and British Columbia do not continue to view the locations of WorldMark's Resorts (which are primarily located in these areas) as attractive vacation destinationsGENERAL ECONOMIC CONDITIONS; CONCENTRATION IN TIMESHARE INDUSTRY Any downturn in economic conditions or significant price increases or adverse events related to the travel and tourism industry, such as the cost and availability of fuel, could depress discretionary consumer spending and have a material adverse effect on the Company's business, results of operations and financial condition. Any such economic conditions, including recession, may also adversely affect the future availability of attractive financing rates for the Company or its customers and may materially adversely affect the Company's business. Furthermore, adverse changes in general economic conditions may adversely affect the collectibility of the Notes Receivable. Because the Company's operations are conducted solely within the timeshare industry, any adverse changes affecting the timeshare industry, such as a reduction in demand for timeshare units, changes in travel and vacation patterns, an increase of governmental regulation of the timeshare industry and increases in construction costs or taxes, as well as negative publicity for the timeshare industry, could have a material adverse effect on the Company's business, results of operations and financial conditionRISKS ASSOCIATED WITH CUSTOMER FINANCING In 1996, the Company provided financing for approximately 87% of the aggregate purchase price of Vacation Credits sold to new Owners, with an average new Note Receivable of approximately $7,500. The 11 12 Company also allows existing Owners the opportunity to finance the purchase of Upgrades. The Company obtains a security interest in the purchased Vacation Credits and it does not verify a prospective Owner's credit history. At June 30, 1997, an aggregate of $207.8 million of Notes Receivable were outstanding, of which approximately $65.3 million had been retained by the Company. The remaining balance of approximately $142.5 million of Notes Receivable had been sold by the Company prior to that date, although the Company retained limited recourse liability with respect to these Notes Receivable. See Notes 4, 5 and 15(a) of Notes to Combined and Consolidated Financial Statements. Notes Receivable become delinquent when a scheduled payment is 30 days or more past due and reservation privileges are suspended when a scheduled payment is 60 days or more past due. At June 30, 1997, approximately $3.8 million of Notes Receivable, including Notes Receivable previously sold by the Company, were past due 60 days or more. The Notes Receivable are secured by a security interest in the related Vacation Credits. The Company's practice has been to continue to accrue interest on Notes Receivable until such accounts are deemed uncollectible, at which time the Company writes off such Notes Receivable and records an expense for any interest that had been accrued, reclaims the related Vacation Credits that secure such Notes Receivable and returns such Vacation Credits to inventory available for resale. However, the associated marketing costs and sales commissions are not recovered by the Company and these expenses must be incurred again to resell the Vacation Credits. The Company maintains a reserve for doubtful accounts in respect of the Notes Receivable owned by the Company and a reserve for recourse liability in respect of the Notes Receivable that have been sold by the Company. The aggregate amount of these reserves at December 31, 1995 and 1996, and June 30, 1997 were $8.0 million, $11.2 million and $13.3 million, respectively, representing approximately 6.3%, 6.2% and 6.4%, respectively, of the total portfolio of Notes Receivable at those dates, including the Notes Receivable that had been sold by the Company. These reserves are estimates and if the amount of the Notes Receivable that is ultimately uncollectible materially exceeds the related reserves, the Company's business, results of operations and financial condition could be materially adversely affected. See "Business -- Customer Financing." INTEREST RATE RISK The Company generally provides financing for a significant portion of the aggregate purchase price of Vacation Credits sold at a fixed interest rate. In order to provide liquidity, the Company, through the Finance Subsidiaries, sells or securitizes its Notes Receivable. Although a significant portion of the existing financing of the Notes Receivable through the Finance Subsidiaries is at a fixed rate or at a variable rate with a cap on the maximum rate, if interest rates were to increase significantly, the Company's future cost of funds would also likely increase significantly. The Company has the ability to respond to rising interest rates by increasing the interest rate offered to finance Vacation Credit purchases. However, such an increase could have a material adverse effect on sales of Vacation Credits or on the percentage of Owners who finance their Vacation Credit purchases through the Company, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business -- Customer Financing" and "-- Finance Subsidiaries." COMPETITION The Company is subject to significant competition from other entities engaged in the business of resort development, sales and operation, including vacation interval ownership, condominiums, hotels and motels. Some of the world's most recognized lodging, hospitality and entertainment companies have begun to develop and sell vacation intervals in resort properties. Major companies that now operate or are developing or planning to develop vacation interval resorts include Marriott International, Inc. ("Marriott"), The Walt Disney Company ("Disney"), Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Four Seasons Hotels & Resorts, Inc. ("Four Seasons"), InterContinental Hotels and Resorts, Inc. ("Inter-Continental"), Westin Hotels & Resorts ("Westin") and Promus Hotels, Inc. ("Promus"). In addition, other publicly-traded companies in the timeshare industry, such as Signature Resorts, Inc. ("Signature"), Fairfield Communities, Inc. ("Fairfield") and Vistana, Inc. ("Vistana"), currently compete, or may in the future compete, with the CompanyMany of these entities possess significantly greater financial, marketing and other 12 13 resources than those of the Company. Management believes that industry competition will be increased by recent and potential future consolidation in the timeshare industry. The Company has entered into marketing agreements with affiliates of its parent, Jeld-Wen, pursuant to which these affiliates may market Vacation Credits for their own account at Eagle Crest Resort in Redmond, Oregon and Running Y Resort in Klamath Falls, Oregon in exchange for their transfer to WorldMark of condominium units at those resorts. These sales activities are competitive with the Company's marketing activities, particularly in the Oregon and northern California markets. See "Certain Transactions -- Relationship with Jeld-Wen." Resales of Vacation Credits by Owners may compete with sales of Vacation Credits by the Company and may inhibit the Company's ability to increase the market price of Vacation Credits it sellsDEPENDENCE ON KEY PERSONNEL The Company's success depends to a large extent upon the experience and abilities of William F. Peare, the Company's President and Chief Executive Officer, Jeffery P. Sites, the Company's Executive Vice President and Chief Operating Officer, and Gary A. Florence, the Company's Vice President, Chief Financial Officer and Treasurer. The loss of the services of any one of these individuals could have a material adverse effect on the Company's business, results of operations and financial condition. Prior to the closing of the Offering, the Company intends to enter into employment agreements with MessrsPeare and Sites. The Company's success is also dependent upon its ability to attract and retain qualified development, acquisition, marketing, management, administrative and sales personnel for which there is keen competition. In addition, the cost of retaining such key personnel could escalate over time There can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Management -- Employment Agreements." APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION CREDITS It is possible that the Vacation Credits may be deemed to be a security as defined in Section 2(1) of the Securities Act of 1933, as amended (the "Securities Act"). If the Vacation Credits were determined to be a security for such purpose, their sale would require registration under the Securities ActThe Company has not registered the sale of the Vacation Credits under the Securities Act and does not intend to do so in the future. If the sale of the Vacation Credits were found to have violated the registration provisions of the Securities Act, purchasers of the Vacation Credits would have the right to rescind their purchases of Vacation Credits. If a substantial number of purchasers sought rescission and were successful, the Company's business, results of operations and financial condition could be materially adversely affected. The Company has been advised by its counsel, Foster Pepper & Shefelman PLLC, that in the opinion of such counsel, based on its review of the Company's Vacation Credit program and the sales practices utilized in such program, the Vacation Credits do not constitute a security within the meaning of Section 2(1) of the Securities ActREGULATION OF MARKETING AND SALES OF VACATION CREDITS; OTHER LAWS The Company's marketing and sales of Vacation Credits and certain of its other operations are subject to extensive regulation by the states and foreign jurisdictions in which the WorldMark Resorts are located and in which Vacation Credits are marketed and sold and also by the federal government. State and Provincial Regulations. Most U.S. states and Canadian provinces have adopted specific laws and regulations regarding the sale of vacation interval ownership programs. Washington, Oregon, California, Hawaii and British Columbia require the Company to register WorldMark Resorts, the Company's vacation program and the number of Vacation Credits available for sale in such state or province with a designated state or provincial authority. The Company must amend its registration if it desires to increase the number of Vacation Credits registered for sale in that state or province. Either the Company or the state or provincial authority assembles a detailed offering statement describing the Company and all material aspects of the project and sale of Vacation Credits. The Company is required to deliver the offering statement to all new purchasers of Vacation Credits, together with certain additional information concerning the terms of the 13 14 purchase. Hawaii imposes particularly stringent and broad regulation requirements for the sale of interests in interval ownership programs that have resort units located in Hawaii. The Company has incurred substantial expenditures over an extended period of time in the registration process in Hawaii and still has not completed this process. Hawaii has allowed the use of WorldMark units in Hawaii, provided that the Company continues in good faith to pursue registration in Hawaii. Laws in each state where the Company sells Vacation Credits grant the purchaser of Vacation Credits the right to cancel a contract of purchase at any time within a period ranging from three to seven calendar days following the later of the date the contract was signed or the date the purchaser received the last of the documents required to be provided by the Company. Most states have other laws which regulate the Company's activities, such as real estate licensure laws, laws relating to the use of public accommodations and facilities by disabled persons, sellers of travel licensure laws, anti-fraud laws, advertising laws and labor laws. Federal Regulations. The Federal Trade Commission has taken an active regulatory role in the interval ownership industry through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce. Other federal legislation to which the Company is or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Opportunity Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate Standards Practices Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Civil Rights Act of 1964 and 1968, the Fair Housing Act and the Americans with Disabilities Act. Although the Company believes that it is in material compliance with all federal, state, local and foreign laws and regulations to which it is currently subject, there can be no assurance that it is in fact in compliance. Any failure by the Company to comply with applicable laws or regulations could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company will continue to incur significant costs to remain in compliance with applicable laws and regulations, and such costs could increase substantially in the futureDEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORK; NO ASSURANCE OF CONTINUED PARTICIPATION The attractiveness of purchasing Vacation Credits is enhanced by the ability of Owners to exchange Vacation Credits for an occupancy right in a resort participating in the RCI network. RCI provides broad-based vacation interval exchange services, and, subject to payment of a fee to RCI, Owners are permitted to exchange their Vacation Credits for vacation use among the resorts which participate in the RCI network. However, no assurance can be given that the Company will continue to be able to ensure that Owners will be eligible to participate in the RCI network or that the weekly RCI exchange value for Vacation Credits will not become less favorable to Owners. Moreover, if the RCI exchange network ceases to function effectively, or if Vacation Credits are not accepted as exchanges for other desirable resorts, the Company's sales of Vacation Credits could be materially adversely affected. See "Business -- Participation in Vacation Interval Exchange Network." POSSIBLE ENVIRONMENTAL LIABILITIES Under various federal, state, local and foreign laws, ordinances and regulations, the owner or operator of real property generally is liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Other federal and state laws require the removal or encapsulation of asbestos-containing material when such material is in poor condition or in the event of construction, demolition, remodeling or renovation. Other statutes may require the removal of underground storage tanks. Noncompliance with these and other environmental, health or safety requirements may result in the need to cease or alter operations at a property. Although the Company conducts an environmental assessment with respect to the properties it acquires for WorldMark, the Company has not received a Phase I environmental report for any WorldMark Resort. There can be no assurance that any environmental assessments undertaken by the Company with respect to the WorldMark Resorts have revealed all potential environmental liabilities, or that an environmental condition does not otherwise exist as to any one 14 15 or more of the WorldMark Resorts that could have a material adverse effect on the Company's business, results of operations and financial conditionNATURAL DISASTERS; UNINSURED LOSS WorldMark maintains property insurance and liability insurance for the units at the WorldMark Resorts, with certain policy specifications, insured limits and deductibles. Certain types of losses, such as losses arising from earthquakes, floods or acts of war, are generally excluded from WorldMark's insurance coverage. Should an uninsured loss or loss in excess of insured limits occur, WorldMark has the option to either (i) remove such units from the Vacation Credit system, which would result in a proportionate dilution of vacation time available for the Vacation Credits which have been sold, or (ii) pay the related costs of replacement. Although WorldMark's board of directors may impose a limited amount of special assessments to pay for capital improvements or major repairs, there can be no assurance that WorldMark would be able to increase assessments to provide sufficient funds to pay for all possible capital improvements and major repairs of the units at the WorldMark Resorts. In such an event, the Company may need to advance funds to WorldMark in order to maintain the quality of the WorldMark Resorts or WorldMark may be required to defer certain improvements or repairs. In addition, the Company may advance funds to WorldMark if WorldMark does not have sufficient funds to pay its obligations in a timely manner. See "Business -- Insurance; Legal Proceedings." EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDER; ANTITAKEOVER PROVISIONS Upon closing of the Offering, Jeld-Wen will own 79.98% of the outstanding shares of Common Stock. This concentration of ownership will give Jeld-Wen control of the election of directors and the management and affairs of the Company and sufficient voting power to determine the outcome of all matters submitted to the stockholders for approval, including mergers, consolidations and the sale of all, or substantially all, of the Company's assets. In addition, certain provisions of Oregon law and of the Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. In addition, the Company is authorized to issue Preferred Stock with rights senior to, and that may adversely affect, the Common Stock, with such rights, preferences and privileges as the Company's Board of Directors may determine, without the necessity of stockholder approval. The Company, however, has no present plans to issue any shares of Preferred Stock. See "Principal and Selling Stockholders," "Description of Capital Stock" and "Certain Provisions of Oregon Law and of Trendwest's Articles of Incorporation and Bylaws." SHARES ELIGIBLE FOR FUTURE SALE Upon closing of the Offering, all of the shares of Common Stock offered hereby will be eligible for public sale without restriction. Holders of the other 14,287,116 shares of Common Stock hold their shares subject to the limitations of Rule 144 of the Securities Act. All holders of these shares have entered into lock-up agreements with the Underwriters not to offer, sell or otherwise dispose of any equity securities of the Company for 360 days after the date of this Prospectus, in the case of Jeld-Wen and the Selling Stockholder, and 180 days after the date of this Prospectus in the case of all other holders, without the prior written consent of Montgomery Securities. Montgomery Securities may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements during the respective lock-up periods. Future sales of substantial amounts of Common Stock, or the potential for such sales, could adversely affect prevailing market prices. See "Shares Eligible for Future Sale" and "Underwriting." IMMEDIATE AND SUBSTANTIAL DILUTION; NO ANTICIPATED DIVIDENDS Purchasers of Common Stock in the Offering will experience immediate dilution in pro forma net tangible book value per share of Common Stock of $11.92 from the initial public offering price per share. See "Dilution." In addition, the Company does not anticipate that it will pay any cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." 15 16 ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE There has been no prior public market for the Company's Common StockAlthough the Common Stock has been approved for quotation on the Nasdaq National Market, there can be no assurance that a viable public market for the Common Stock will develop or be sustained after the Offering or that purchasers of the Common Stock will be able to resell their Common Stock at prices equal to or greater than the initial public offering price. The initial public offering price was determined by negotiations among the Company, the Selling Stockholder and the representatives of the Underwriters and may not be indicative of the prices that may prevail in the public market after the Offering is completedNumerous factors, including announcements of fluctuations in the Company's or its competitors' operating results and market conditions for hospitality and timeshare industry stocks in general, could have a significant impact on the future price of the Common Stock. In addition, the stock market in recent years has experienced significant price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many growth companies, and have often been unrelated or disproportionate to the operating performance of these specific companies. These broad fluctuations may adversely affect the market price of the Common Stock. See "Underwriting." 16
 
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risk factors investing in our common stock involves a high degree of risk. you should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. if any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. in that case, the trading price of our common stock could decline, and you may lose some or all of your investment. risks related to our businesswe have no operating history and may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders. we were organized as a delaware corporation on june3, 2009, but have had no operations since that time. we filed a certificate of dissolution in delaware on may5, 2010 and revoked such dissolution by filing a certificate of revocation of dissolution on march24, 2011. we have no operating history. we have no assets and will commence operations only upon completion of this offering and the concurrent private placements. we cannot assure you that we will be able to operate our business successfully or implement our operating policies and strategies as described in this prospectus. the results of our operations depend on several factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and economic conditions.we may change any of our strategies, policies or procedures without stockholder consent. we may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization, distributions, financing strategy and leverage at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. a change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this prospectus. these changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.we have not yet identified any specific investments we may make with the net proceeds of this offering. we have not yet identified any specific investments we may make with the net proceeds of this offering and as a result, you will not be able to evaluate any proposed investments before purchasing shares of our common stock. additionally, our investments will be selected by our manager and our stockholders will not have input into such investment decisions. both of these factors will increase the uncertainty, and thus the risk, of investing in shares of our common stock. until appropriate investments can be identified, our manager may invest the net proceeds of this offering and the concurrent private placements in interest-bearing short-term investments, including money market accounts and/or funds, that are consistent with our intention to qualify as a reit. these initial investments, if any, are expected to provide a lower net return than we will seek to achieve from investments in agency rmbs. we anticipate that we will be able to identify a sufficient amount of investments in agency rmbs within approximately one to two months after the closing of this offering and the concurrent private placements. however, depending on the availability of appropriate investment opportunities and subject to prevailing market conditions, there can be no assurance that we will be able to identify a sufficient amount of investments within this timeframe. see "use of proceeds." our manager intends to conduct due diligence with respect to each investment and suitable investment opportunities may not be immediately available. even if opportunities are available, there can be no assurance that our manager's due diligence processes will uncover all relevant facts or that any investment will be successful. furthermore, you will be unable to evaluate the manner in which the net proceeds of this offering and the concurrent private placements will be invested or the economic merit of our expected investments and, as a result, we may use the net proceeds from these offerings to make investments with which you may not agree. the failure of our management to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns, could cause a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders, and could cause the value of our common stock to decline. risks related to our investing strategymortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, agency rmbs and our potential target assets. the u.s. government, through the u.s. federal reserve, the federal housing administration, or the fha, and the federal deposit insurance corporation, has implemented a number of federal programs designed to assist homeowners, including the home affordable modification program, or hamp, which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, the hope for homeowners program, or h4h program, or harp, which allows certain distressed borrowers to refinance their mortgages into fha-insured loans in order to avoid residential mortgage loan foreclosures, and the home affordable refinance program, which allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments at loan-to-value ratios up to 125% (and, in some cases, above 125%) without new mortgage insurance. hamp, the h4h program and other loss mitigation programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or the extension of payment terms of the loans. in september 2011, the white house announced they are working on a major plan to allow certain homeowners who owe more on their mortgages than their homes are worth to refinance. in october 2011, the fhfa announced changes to the harp to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the harp loan-to-value ratio above 125%. however, this would only apply to mortgages guaranteed by the u.s. government-sponsored entities. there are many challenging issues to this proposal, notably the question as to whether a loan with a loan-to-value ratio of 125% qualifies as a mortgage or an unsecured consumer loan. the chances of this initiative's success have created additional uncertainty in the agency rmbs market, particularly with respect to possible increases in prepayment rates. on january4, 2012, the u.s. federal reserve issued a white paper outlining additional ideas with regard to refinancings and loan modifications. it is likely that loan modifications would result in increased prepayments on some agency rmbs. especially with non-agency rmbs, a significant number of loan modifications with respect to a given security, including, but not limited to, those related to principal forgiveness and coupon reduction, resulting in increased prepayment rates, could negatively impact the realized yields and cash flows on such security. these loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with the federal national mortgage association, or fnma, the federal home loan mortgage corporation, or fhlmc, or the government national mortgage association, or gnma, may adversely affect the value of, and the returns on, agency rmbs and our potential target assets that we may purchase.actions of the u.s. government, including the u.s. congress, federal reserve, u.s. treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market responses to those actions, may not achieve the intended effect and may adversely affect our business. in response to the financial issues affecting the banking system and financial markets and going concern threats to commercial banks, investment banks and other financial institutions, the emergency economic stabilization act, or eesa, was enacted by the u.s. congress in 2008. there can be no assurance that the eesa or any other u.s. government actions will have a beneficial impact on the financial markets. to the extent the markets do not respond favorably to any such actions by the u.s. government or such actions do not function as intended, our business may not receive the anticipated positive impact from the legislation and such result may have broad adverse market implications. in july 2010, the u.s. congress enacted the dodd frank wall street reform and consumer protection act, or the dodd-frank act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to u.s. financial markets. for instance, the dodd-frank act will impose significant restrictions on the proprietary trading activities of certain banking entities and subject other systemically significant organizations regulated by the u.s. federal reserve to increased capital requirements and quantitative limits for engaging in such activities. the dodd-frank act also seeks to reform the asset-backed securitization market (including the mortgage-backed securities market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. certain of the new requirements and restrictions exempt agency rmbs, other government issued or guaranteed securities, or other securities. nonetheless, the dodd-frank act also imposes significant regulatory restrictions on the origination of residential mortgage loans. while the full impact of the dodd-frank act cannot be assessed until all implementing regulations are released, the dodd-frank act's extensive requirements may have a significant effect on the financial markets, and may affect the availability or terms of financing from our lender counterparties and the availability or terms of mortgage-backed securities, both of which may have an adverse effect on our financial condition and results of operations. in addition, the u.s. government, federal reserve, u.s. treasury and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. we cannot predict whether or when such actions may occur or what effect, if any, such actions could have on our business, results of operations and financial condition.the federal conservatorship of fnma and fhlmc and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the u.s. government, may adversely affect our business. the payments of principal and interest we receive on our agency rmbs, which depend directly upon payments on the mortgages underlying such securities, are guaranteed by fnma, fhlmc and gnma. fnma and fhlmc are u.s. government-sponsored entities, or gses, but their guarantees are not backed by the full faith and credit of the united states. gnma is part of a u.s. government agency and its guarantees are backed by the full faith and credit of the united states. in response to general market instability and, more specifically, the financial conditions of fnma and fhlmc, in july 2008, the housing and economic recovery act of 2008, or hera, established a new regulator for fnma and fhlmc, the u.s. federal housing finance agency, or the fhfa. in september 2008, the u.s. treasury, the fhfa and the u.s. federal reserve announced a comprehensive action plan to help stabilize the financial markets, support the availability of mortgage financing and protect taxpayers. under this plan, among other things, the fhfa was appointed as conservator of both fnma and fhlmc, allowing the fhfa to control the actions of the two gses, without forcing them to liquidate, which would be the case under receivership. importantly, the primary focus of the plan was to increase the availability of mortgage financing by allowing these gses to continue to grow their guarantee business without limit, while limiting the size of their retained mortgage and agency security portfolios and requiring that these portfolios be reduced over time. although the u.s. government has committed to support the positive net worth of fnma and fhlmc through 2012, there can be no assurance that these actions will be adequate for their needs. these uncertainties lead to questions about the availability of, and trading market for, agency rmbs. despite the steps taken by the u.s. government, fnma and fhlmc could default on their guarantee obligations which would materially and adversely affect the value of our agency rmbs. accordingly, if these government actions are inadequate and the gses continue to suffer losses or cease to exist, our business, operations and financial condition could be materially and adversely affected. in addition, the problems faced by fnma and fhlmc resulting in their being placed into federal conservatorship and receiving significant u.s. government support have sparked serious debate among federal policy makers regarding the continued role of the u.s. government in providing liquidity for mortgage loans. the future roles of fnma and fhlmc could be significantly reduced and the nature of their guarantee obligations could be considerably limited relative to historical measurements. any such changes to the nature of their guarantee obligations could redefine what constitutes an agency security and could have broad adverse implications for the market and our business, operations and financial condition. if fnma or fhlmc were eliminated, or their structures were to change radically (i.e., limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, we could be unable to acquire additional agency rmbs and our existing agency rmbs could be materially and adversely impacted. we could be negatively affected in a number of ways depending on the manner in which related events unfold for fnma and fhlmc. we will rely on our agency rmbs (as well as non-agency rmbs) as collateral for our financings under the repurchase agreements that we intend to enter into upon the completion of this offering. any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on our agency rmbs on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions. further, the current support provided by the u.s. treasury to fnma and fhlmc, and any additional support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from agency rmbs, thereby tightening the spread between the interest we earn on our agency rmbs and the cost of financing those assets. a reduction in the supply of agency rmbs could also negatively affect the pricing of agency rmbs by reducing the spread between the interest we earn on our investment portfolio of agency rmbs and our cost of financing that portfolio. as indicated above, recent legislation has changed the relationship between fnma and fhlmc and the u.s. government. future legislation could further change the relationship between fnma and fhlmc and the u.s. government, and could also nationalize, privatize, or eliminate such entities entirely. any law affecting these gses may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by fnma or fhlmc. as a result, such laws could increase the risk of loss on our investments in agency rmbs guaranteed by fnma and/or fhlmc. it also is possible that such laws could adversely impact the market for such securities and spreads at which they trade. all of the foregoing could materially and adversely affect our financial condition and results of operations. we will be subject to the risk that u.s. government agencies and/or gses may not be able to fully satisfy their guarantees of agency rmbs or that these guarantee obligations may be repudiated, which may adversely affect the value of our assets and our ability to sell or finance these securities. the interest and principal payments we will receive on the agency rmbs in which we intend to invest will be guaranteed by fnma, fhlmc or the gnma. unlike the gnma securities in which we may invest, the principal and interest on securities issued by fnma and fhlmc are not guaranteed by the u.s. government. all the agency rmbs in which we intend to invest depend on a steady stream of payments on the mortgages underlying the securities. as conservator of fnma and fhlmc, the fhfa may disaffirm or repudiate contracts (subject to certain limitations for qualified financial contracts) that fhlmc or fnma entered into prior to the fhfa's appointment as conservator if it determines, in its sole discretion, that performance of the contract is burdensome and that disaffirmation or repudiation of the contract promotes the orderly administration of its affairs. the hera requires the fhfa to exercise its right to disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator. fnma and fhlmc have disclosed that the fhfa has disaffirmed certain consulting and other contracts that these entities entered into prior to the fhfa's appointment as conservator. fhlmc and fnma have also disclosed that the fhfa has advised that it does not intend to repudiate any guarantee obligation relating to fnma and fhlmc's mortgage-related securities, because the fhfa views repudiation as incompatible with the goals of the conservatorship. in addition, the hera provides that mortgage loans and mortgage-related assets that have been transferred to a fhlmc or fnma securitization trust must be held for the beneficial owners of the related mortgage-related securities, and cannot be used to satisfy the general creditors of fhlmc or fnma. if the guarantee obligations of fhlmc or fnma were repudiated by fhfa, payments of principal and/or interest to holders of agency rmbs issued by fhlmc or fnma would be reduced in the event of any borrowers' late payments or failure to pay or a servicer's failure to remit borrower payments to the trust. in that case, trust administration and servicing fees could be paid from mortgage payments prior to distributions to holders of agency rmbs. any actual direct compensatory damages owed due to the repudiation of fhlmc or fnma's guarantee obligations may not be sufficient to offset any shortfalls experienced by holders of agency rmbs. fhfa also has the right to transfer or sell any asset or liability of fhlmc or fnma, including its guarantee obligation, without any approval, assignment or consent. if fhfa were to transfer fhlmc or fnma's guarantee obligations to another party, holders of agency rmbs would have to rely on that party for satisfaction of the guarantee obligation and would be exposed to the credit risk of that party.we operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in agency rmbs and our potential target assets and could also affect the pricing of these securities. we operate in a highly competitive market for investment opportunities. our profitability depends, in large part, on our ability to acquire agency rmbs and our potential target assets at attractive prices. in acquiring these assets, we will compete with a variety of institutional investors, including other reits, specialty finance companies, public and private funds (including other funds managed by our manager), commercial and investment banks, commercial finance and insurance companies and other financial institutions. many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. several other reits have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the u.s. government. many of our competitors are not subject to the operating constraints associated with reit tax compliance or maintenance of an exemption from the 1940 act. in addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. furthermore, competition for investments in agency rmbs and our potential target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. we cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. also, as a result of this competition, desirable investments in these assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.the lack of liquidity in our investments may adversely affect our business. we expect that the assets that we will acquire will not be publicly traded. a lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. in addition, mortgage-related assets generally experience periods of illiquidity, including the recent period of delinquencies and defaults with respect to residential and commercial mortgage loans. the illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. in addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our manager has or could be attributed with material, non-public information regarding such business entity. as a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.adverse developments in the broader residential mortgage market may adversely affect the value of the assets in which we intend to invest. since 2007, the residential mortgage market in the united states has experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market. these losses reduced financial industry capital, leading to reduced liquidity for some institutions. these factors have impacted investor perception of the risk associated with real estate-related assets, including agency rmbs and other high-quality rmbs assets. as a result, values for rmbs assets, including some agency rmbs and other aaa-rated rmbs assets, have experienced a certain amount of volatility. further increased volatility and deterioration in the broader residential mortgage and rmbs markets may adversely affect the performance and market value of the agency and non-agency rmbs in which we intend to invest. we intend to invest in agency rmbs and non-agency rmbs. we will need to rely on our securities as collateral for our financings. any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. the securities we intend to acquire will be classified for accounting purposes as available-for-sale. all assets classified as available-for-sale will be reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. as a result, a decline in fair values may reduce the book value of our assets. moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such decline will reduce earnings. if market conditions result in a decline in the fair value of our assets, our financial position and results of operations could be adversely affected.a prolonged economic recession and further declining real estate values could impair our assets and harm our operations. the risks associated with our business are more severe during economic recessions and are compounded by declining real estate values. the non-agency rmbs in which we may invest a part of our capital will be particularly sensitive to these risks. declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential real estate weakens further. further, declining real estate values significantly increase the likelihood that we will incur losses on non-agency rmbs in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from non-agency rmbs in our portfolio, which could have an adverse effect on our financial condition, results of operations and our ability to make distributions to our stockholders.our investments in non-agency rmbs are generally subject to losses. we may acquire non-agency rmbs. in general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or b-note, if any, then by the "first loss" subordinated security holder and then by the holder of a higher-rated security. in the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or b-notes, and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase. in addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related non-agency rmbs. the prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.the mortgage loans underlying the non-agency rmbs that we may acquire will be subject to defaults, foreclosure timeline extension, fraud and residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to us. our potential investments in non-agency rmbs will be subject to the risks of defaults, foreclosure timeline extension, fraud and home price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, accompanying the underlying residential mortgage loans. the ability of a borrower to repay a mortgage loan secured by a residential property is dependent upon the income or assets of the borrower. a number of factors may impair borrowers' abilities to repay their loans, including: adverse changes in national and local economic and market conditions; changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; costs of remediation and liabilities associated with environmental conditions such as indoor mold; the potential for uninsured or under-insured property losses; acts of god, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on september11, 2001. in the event of defaults on the residential mortgage loans that underlie our investments in non-agency rmbs and the exhaustion of any underlying or any additional credit support, we may not realize our anticipated return on our investments and we may incur a loss on these investments. in addition, our investments in non-agency rmbs will be backed by residential real property but, in contrast to agency rmbs, their principal and interest will not be guaranteed by a u.s. government agency or a gse. the ability of a borrower to repay these loans or other financial assets is dependent upon the income or assets of these borrowers.we may be affected by alleged or actual deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process. allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents used in foreclosure proceedings (so-called "robo signing"), inadequate documentation of transfers and registrations of mortgages and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization and failure to enforce put-backs. as a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. in late 2010, a group of state attorneys general and state bank and mortgage regulators representing nearly all 50 states and the district of columbia, along with the u.s. justice department and the department of housing and urban development, began an investigation into foreclosure practices of banks and servicers. the investigations and lawsuits by several state attorneys general led to a proposed settlement agreement in early february 2012 with five of the nation's largest banks, pursuant to which the banks agreed to pay more than $25billion to settle claims relating to improper foreclosure practices. the proposed settlement does not prohibit the states, the federal government, individuals or investors in rmbs from pursuing additional actions against the banks and servicers in the future. the integrity of the servicing and foreclosure processes are critical to the value of the mortgage loan portfolios underlying the rmbs in which we intend to invest, and our financial results could be adversely affected by deficiencies in the conduct of those processes. for example, delays in the foreclosure process that have resulted from investigations into improper servicing practi
 
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RISK FACTORS You should carefully consider the risks described below before making a decision to invest in our common stock. RISKS RELATED TO OUR BUSINESS AND FINANCIAL PERFORMANCE OUR LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO VALUE AND EVALUATE OUR BUSINESS AND OUR FUTURE PROSPECTS We commenced operations in September 1997 and commercially released our first product in the first quarter of 1999. Your evaluation of the risks and uncertainties of our business will be difficult because of our limited operating history. In addition, our limited operating history means that we have less insight into how technological and market trends may affect our business. The revenue and income potential of our business and market are unproven. You must consider our business and prospects in light of the risks and difficulties typically encountered by companies in their early stages of development, particularly those in new, rapidly evolving and highly competitive markets such as the market for broadband access solutions WE HAVE INCURRED SUBSTANTIAL LOSSES TO DATE AND MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABILITY, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE Since we began operations, we have incurred net losses in every fiscal period. We incurred a net loss of $9.1 million in the first six months of 2000 and our accumulated deficit through June 30, 2000 was $25.6 million. We expect to incur net losses in the future. Our operating losses have been due in part to the commitment of significant resources to our research and development and sales and marketing organizations. We expect our expenses to continue to increase in an effort to develop our business and, as a result, we will need to generate significant revenue to achieve profitability. We cannot be certain if or when we will become profitable. Our failure to become profitable within the timeframe expected by investors may adversely affect the market price of our common stockUNEXPECTED FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE Our operating results are difficult to forecast and may fluctuate significantly from quarter to quarter. As a result of our limited operating history, we do not have historical financial data for a significant number of periods upon which to forecast quarterly financial performance. It is likely that in some future quarters, our operating results may fall below the expectations of investors or securities analysts, which could cause the price of our common stock to fall substantiallyIF WE FAIL TO INCREASE OUR REVENUE, OR IF WE EXPERIENCE DELAYS IN GENERATING REVENUE, WE WILL CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES We plan to significantly increase our operating expense to fund greater levels of research and development, expand our sales and marketing operations, broaden our customer support capabilities and develop new distribution channels. We also plan to expand our general and administrative capabilities to address the demands resulting from this offering and the continued growth of our business. Our operating expenses are largely based on anticipated personnel requirements and revenue trends, and a high percentage of our expenses are, and will continue to be, fixed. In addition, we may be required to spend more in research and development than originally budgeted in order to respond to industry trends. As a result, if we fail to increase our revenue, or if we experience delays in generating revenue, we will continue to incur substantial operating lossesTHERE IS INTENSE COMPETITION IN THE MARKET FOR BROADBAND ACCESS SOLUTIONS AND IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUE COULD DECLINE AND WE COULD EXPERIENCE ADDITIONAL LOSSES The market for broadband access solutions is new, rapidly evolving and very competitive. We expect competition in this market to increase as a result of a number of factors, including the entrance of new or larger competitors and the introduction of new products or technologies. This competition could, among other things: - divert sales from us; - force us to charge lower prices; and 5 8 - adversely affect our strategic relationships with manufacturers, resellers and others. If any of these risks occurred, our revenues could decline, our gross margins could decrease, our expenses could increase and we could experience additional losses. Our principal competitors may be different depending on the market we target, and include large networking equipment companies such as Alcatel, Cisco Systems, Lucent Technologies, Marconi(Fore) and Nortel Networks, as well as companies such as Accelerated Networks, ADC Kentrox, and Tiara NetworksMany of our current and potential competitors are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, competitors with large market capitalization or cash reserves are much better positioned than we are to acquire other companies, including our competitors, and thereby acquire new technologies or products that may displace our product linesWE PURCHASE SEVERAL OF OUR KEY COMPONENTS FROM SINGLE SOURCES, AND WE COULD LOSE REVENUE AND MARKET SHARE IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF THOSE COMPONENTS Several key components of our products are currently available from single or limited sources with whom we have no guaranteed supply agreements, including: - programmable chips supplied by Lucent Technologies; - asynchronous transfer mode, or ATM, chips supplied by Conexant Systems Inc.; and - circuit emulation chips supplied by PMC-Sierra, Inc. If we are unable to obtain a sufficient supply of these or other critical components from our current vendors: - we may be unable to manufacture and ship our products on a timely basis, which could result in lost or delayed revenue, harm to our reputation, increased manufacturing costs and exposure to claims by our customers; and - we may be forced either to develop alternative sources of supply or to modify the design of our products to use more readily available components, which may take a long time and may involve significant additional expense. For example, during the first quarter of 2000, we encountered delays in receiving programmable chips used in our A-1240 product, which resulted in production delays. In addition, our vendors may increase their prices for these components. Accordingly, the lack of alternative sources for these components may also force us to pay higher prices for these components, which would cause our gross margins to decreaseWE ARE ENTIRELY DEPENDENT ON OUR LINE OF BROADBAND ACCESS PLATFORM PRODUCTS AND OUR PRODUCTS MAY NOT BE READILY ACCEPTED Widespread commercial acceptance of our products is critical to our future success. To date, our A-1000, A-2000, A-1240, A-3010 and A-4000 products are the only products that we have sold and we expect that revenue from these products will account for a substantial portion of our revenue for the foreseeable future. We intend to develop and introduce new products and enhancements to existing products in the future. If our target customers do not adopt, purchase and successfully deploy our current and planned products, our revenue will not grow significantly. The acceptance of our products may be hindered by: - the failure of prospective customers to recognize the value of broadband access platform products; - the reluctance of our prospective customers to replace or expand their current access equipment, which may be supplied by more established vendors, with our products; and - the emergence of new technologies or industry standards that could cause our products to be less competitive or become obsolete. 6 9 BECAUSE MOST OF OUR SALES ARE MADE UNDER SHORT-TERM PURCHASE ORDERS, WE MAY EXPEND SIGNIFICANT RESOURCES AND BE UNABLE TO RECOVER THE COSTS IF OUR CUSTOMERS FAIL TO PURCHASE ADDITIONAL PRODUCTS Our contracts and purchase orders are separately negotiated with each of our customers and the terms may vary widely. A majority of our sales are made under short-term purchase orders for one or a few of our products at one time instead of long-term contracts for large scale deployment of our products. These purchase orders do not ensure that they will purchase any additional products other than those specifically listed in the order. Moreover, since we believe that these purchase orders represent the early portion of longer term customer programs, we expend significant financial and personnel resources and expand our operations to be able to fulfill these programs. If our customers fail to purchase additional products to expand their programs as we expect, we may be unable to recover the costs we incurredOUR CUSTOMER CONTRACTS ALLOW OUR CUSTOMERS TO TERMINATE WITHOUT SIGNIFICANT PENALTIES Our contracts are generally non-exclusive and contain provisions allowing our customers to terminate them without significant penalties. Our contracts also may specify the achievement of shipment, delivery and installation commitments. We are generally able to meet these commitments or negotiate extensions with our customers. However, if we fail to meet these commitments in a timely manner, our customers may choose to terminate their contracts with us or impose monetary penalties. If our customers elect to terminate their contracts with us, our future revenues would be reducedWE DEPEND UPON A SINGLE CONTRACT MANUFACTURER TO MANUFACTURE SUBSTANTIALLY ALL OF OUR PRODUCTS. IF THAT MANUFACTURER IS UNABLE OR UNWILLING TO MANUFACTURE A SUFFICIENT QUANTITY OF OUR PRODUCTS, OUR REVENUE MAY DECLINE AND OUR CUSTOMER RELATIONSHIPS MAY BE DAMAGED We currently subcontract the manufacturing and testing of substantially all of our products to Benchmark Electronics, an independent manufacturer with whom we have no long-term agreement. Our reliance on a single manufacturer exposes us to a number of risks, including reduced control over manufacturing capacity, product completion and delivery times, product quality and manufacturing costs. If, as we anticipate, we experience increased demand for our products and introduce new products and product enhancements, the challenges we face in managing our relationship with Benchmark will be increased. If Benchmark is unable or unwilling to manufacture a sufficient quantity of products for us, on the time schedules and with the quality that we demand: - we may not be able to fulfill customer orders on a timely basis; and - we may be forced to engage additional or replacement manufacturers, which is expensive and time consuming. If that occurs, our revenue may decline and our customer relationships may be damagedIF WE FAIL TO PREDICT OUR MANUFACTURING AND COMPONENT REQUIREMENTS ACCURATELY, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS We provide forecasts of our demand to our contract manufacturer and component vendors up to six months prior to scheduled delivery of products to our customers. If we overestimate our requirements, we may have excess inventory, which could increase our costs and harm our relationships with our contract manufacturer and component vendors by reducing our future orders. If we underestimate our requirements, we may have an inadequate inventory of components. Inadequate inventory could interrupt manufacturing of our products and result in delays in shipments. In addition, lead times for materials and components that we order are long and depend on factors such as the procedures of, or contract terms with, a specific supplier and demand for each component at a given time. In the case of some components in short supply, component vendors have imposed strict allocations that limit the number of these components they will supply to a given customer in a specified time period. These vendors may choose to increase allocations to larger, more established companies, which could reduce our allocations and harm our ability to manufacture our productsDUE TO THE LONG AND UNPREDICTABLE SALES CYCLE FOR OUR PRODUCTS, THE TIMING OF REVENUE IS DIFFICULT TO PREDICT AND MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE UNEXPECTEDLY The sales and deployment cycle for our products is lengthy and varies substantially from customer to customer; it may extend for six months or more. The length of our sales cycle may cause our revenue and 7 10 operating results to vary unexpectedly from quarter to quarter. A customer's decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process. Consequently, we may incur substantial expenses and devote senior management attention to potential relationships that never materialize, in which event our investments will largely be lost and we may miss other opportunitiesBECAUSE WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A LIMITED NUMBER OF CUSTOMERS, ANY LOSS OF OR DELAY IN RECEIVING REVENUE FROM THOSE CUSTOMERS COULD SIGNIFICANTLY DAMAGE OUR FINANCIAL PERFORMANCE We have historically derived a significant portion of our revenue from a relatively small number of customers. If any of these customers stop or delay purchasing products or services from us, our financial performance would be negatively impacted. For the year ended December 31, 1999, 2nd Century Communications and AccessLan accounted for 22% and 53% of our revenue. These same customers accounted for 11% and 10% of our revenue for the six months ended June 30, 2000. One additional customer, Broadband Office, accounted for 53% of our revenue for the six months ended June 30, 2000. Most of our customers are not contractually obligated to purchase future products or services from us, and they may discontinue doing so at any time. In addition, although our largest customers will probably vary from period to period, we anticipate that a small number of customers will continue to represent a large percentage of our revenue in any given fiscal period. Accordingly, the failure to obtain a significant order from a customer within the fiscal period expected by us could have a significant adverse effect on our financial performance for that fiscal periodWE ANTICIPATE THAT THE AVERAGE SELLING PRICES OF OUR PRODUCTS WILL DECLINE, WHICH COULD REDUCE OUR GROSS MARGINS AND REVENUE Our industry has experienced rapid erosion of average product selling prices. We anticipate that the average selling prices of our products will decline in response to competitive pressures, increased sales discounts, new product introductions by our competitors or other factors. We are seeking to improve our product design to reduce our costs and increase our sales. If we are unable to do so, declines in average selling prices will reduce our gross margins and revenueIF NETWORK SERVICE PROVIDERS CHOOSE A PROTOCOL OTHER THAN ATM FOR THEIR CORE NETWORKS AND WE ARE NOT ABLE TO ADAPT TO THE CHANGE, OUR TARGET MARKET COULD BE REDUCED While we have designed a product that is adaptable to many communications protocols, our initial architecture is based on an ATM infrastructure. In the service providers' networks ATM competes with other protocols such as time division multiplexing (TDM) and Internet protocol (IP). We believe that an eventual migration to an IP-based protocol is possible. To the extent that network service providers choose a protocol other than ATM for their core networks, we may not be able to react in time or adapt to the change and our target market could be substantially reducedIF WE ARE NOT SUCCESSFUL IN DEVELOPING AND MARKETING, OR IF WE ARE DELAYED IN INTRODUCING, NEW AND ENHANCED PRODUCTS AND FEATURES THAT KEEP PACE WITH TECHNOLOGY AND OUR CUSTOMERS' NEEDS AND EXPECTATIONS, OUR SALES AND COMPETITIVE POSITION WILL SUFFER The market for broadband access solutions is characterized by rapidly changing technologies, frequent new product introductions and evolving customer requirements and industry standards. In order to remain competitive, we will need to introduce on a timely basis new products or product enhancements that offer significantly improved performance and features, at lower prices, and we may not be successful in doing so. Some prior versions of our products were released behind schedule, and this may happen again in the future. Delays in introducing new products and features, or the introduction of new products which do not meet the evolving demands of our customers, could damage our reputation and cause a loss of or delay in revenueIF WE DO NOT EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, WE MAY BE UNABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS, WHICH MAY PREVENT US FROM ACHIEVING AND MAINTAINING PROFITABILITY Our products and services require a technical sales effort targeted at several key people within each of our prospective customers' organizations. Our sales efforts require the attention of sales personnel and specialized system engineers with extensive experience in networking technologies. Competition for these individuals is 8 11 intense, and we may not be able to hire sufficient numbers of qualified sales personnel and specialized system engineers. We also plan to expand our relationships with resellers and original equipment manufacturers. If we fail to develop or cultivate relationships with significant resellers or original equipment manufacturers, or if these resellers and original equipment manufacturers are not successful in their sales efforts, our business may be harmed. Many of our resellers also sell our competitors' products. Failure to expand these channels could adversely affect our revenues and operating resultsIF WE DO NOT EXPAND OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION, WE MAY BE UNABLE TO INCREASE OUR SALES In response to our growing base of product installations, we will need to increase our customer service and support organization to support new and existing customers. We generally do not enter into service contracts as part of our sales process, and our products have not required extensive servicing to date. However, as our product base continues to expand, we intend to offer an enhanced level of customer support on a post-product sale basis both to generate additional revenue opportunities and to distinguish us from our competitors. Our products are complex and require highly-trained customer service and support personnel. Hiring customer service and support personnel is difficult in our industry due to the limited number of people available with the necessary technical skills. If we are unable to expand our customer service and support organization and train our personnel rapidly, we may not be able to increase salesIF WE ARE NOT ABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL, OR IF WE LOSE KEY PERSONNEL, WE MAY BE UNABLE TO MANAGE OR GROW OUR BUSINESS The growth of our business and revenue depends in large part upon our ability to attract and retain sufficient numbers of highly skilled employees, particularly qualified sales and engineering personnel. Qualified personnel are in great demand throughout our industry, particularly in the Washington, D.C. metropolitan area. We may not be successful in hiring and retaining the skilled personnel that we needOur future success also depends to a significant degree on the skills and efforts of Asghar Mostafa, our co-founder, Chairman of the Board and Chief Executive Officer, and on the ability of our other executive officers and members of senior management to work effectively as a team. The loss of the services of Mr. Mostafa or one or more of our other executive officers or senior management members could have a material adverse effect on our financial performance and ability to competeOUR COMPANY IS GROWING RAPIDLY AND WE MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH COULD RESULT IN LOST SALES OR DISRUPTIONS TO OUR BUSINESS Our failure to effectively manage our recent and anticipated growth could have a material adverse effect on the quality of our products, our ability to retain key personnel and our financial performance. From June 30, 1999 to June 30, 2000, the number of our employees increased from 50 to 122. In addition, the proceeds of this offering will be used in part to further expand our operations and increase the number of our employees. This growth has strained, and may further strain, our management, operational systems and other resources. To manage our growth effectively, we must be able to enhance our financial and accounting systems and controls, integrate new personnel and manage expanded operations. We may not be able to do soWE ARE BEGINNING TO EXPAND OUR INTERNATIONAL BUSINESS, WHICH EXPOSES US TO ADDITIONAL RISKS THAT WE DO NOT FACE IN OUR U.S. BUSINESS In 1999, we derived approximately 10% of our revenue from sales outside the United States, and we expect that percentage to increase as our business grows. An expanded international business exposes us to a number of risks that we do not have to address in our U.S. operations. These risks include: - longer sales cycles; - challenges and costs inherent in managing geographically dispersed operations; - protectionist laws and business practices that favor local competitors; - difficulties in finding and managing local resellers; - diverse and changing governmental laws and regulations, including greater regulation of the telecommunications industry; and 9 12 - foreign currency exchange rate fluctuationsIf we are unsuccessful in addressing these risks, our international business will not achieve the revenue or profits we expect IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS, WE MAY LOSE SALES AND INCUR ADDITIONAL EXPENSES Our success depends in part on both the adoption of industry standards for technologies in the broadband access solutions market and our products' compliance with those industry standards as different standards emerge, evolve and achieve acceptance. The absence of industry standards for a particular technology may prevent widespread adoption of products based on that technology. In addition, because many technological developments occur prior to the adoption of related industry standards, we may develop products that do not comply with the industry standards that are eventually adopted, which would hinder our ability to sell those products. Moreover, if a competitor obtains a leadership position in selling broadband access products, that competitor may have the ability to establish de facto standards within the industryIF OUR PRODUCTS CONTAIN DEFECTS OR FAIL TO PERFORM PROPERLY OR WORK EFFECTIVELY WITH OUR CUSTOMERS' NETWORKS, WE COULD LOSE REVENUE AND INCUR DAMAGE TO OUR REPUTATION AND LIABILITY TO OUR CUSTOMERS Our products must work effectively with our customers' existing networks, which typically include products from a variety of different vendors and utilize multiple protocol standards. The complexity of these networks makes it difficult for us to ensure that our products will function properly within these networks and also makes it difficult for us to identify the source of any problems which occur in the operation of our products. Despite testing by us and our customers, our products may contain undetected software or hardware errors which result in product failures or poor product performance. We have experienced such errors in the past in connection with new products and product upgrades. We expect that such errors will be found from time to time in new or enhanced products after we have already shipped the products. If our products contain defects or fail to work properly, we may: - suffer a loss of or delay in revenue; - incur additional expenses in our efforts to identify and remedy the problems; - suffer damage to our reputation; and - be exposed to damage claims by our customersCLAIMS BY NORTEL NETWORKS OR OTHER COMPANIES THAT WE ARE INFRINGING THEIR PROPRIETARY RIGHTS COULD HINDER OR BLOCK OUR ABILITY TO SELL OUR PRODUCTS, SUBJECT US TO SIGNIFICANT MONETARY LIABILITY AND DIVERT THE TIME AND ATTENTION OF OUR MANAGEMENT The broadband access equipment industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the data communications and networking markets have extensive patent portfolios with respect to networking technology. We recently received a letter from Nortel Networks Corporation alleging that a specific feature of our products infringes one of Nortel's patents relating to inverse multiplexing over ATM. We believe that our products do not infringe the relevant Nortel patent and we intend to contest this claim vigorously. However, we cannot assure you that we will prevail in our objection to this claim or any other claim Nortel may make with respect to other patents it owns, nor can we assure you that this dispute will not result in litigation or that an adverse result or judgment will not adversely affect our financial condition. The Nortel claim could be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop non-infringing technology. If Nortel succeeds in its claim, we would need to enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at allWe expect that we may increasingly be subject to infringement claims as the numbers of products and competitors in the market for broadband access equipment grows and the functionality of products overlaps. If there is a successful claim of infringement or if we fail to develop non-infringing technology or license proprietary rights on a timely basis that may become necessary, our ability to use technologies, products, and brand names may be limited and our business may be harmed. 10 13 OUR COMPETITIVE POSITION WOULD BE ADVERSELY AFFECTED IF WE WERE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS Our success and competitiveness are dependent to a significant degree on the protection of our proprietary rights. We rely primarily on a combination of copyrights, trademarks, trade secret laws and contractual restrictions and, to a lesser extent, on patents to protect our proprietary rights. We have one U.S. patent, and we have filed a corresponding application under the Patent Cooperation Treaty relating to the management of tunneling protocols. There can be no assurance that these patent applications will be approved, that any issued patents will protect our intellectual property or that third parties will not challenge them. We enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite these precautions, we cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. Others may be able to copy or reverse engineer aspects of our products, to obtain and use information that we regard as proprietary or to independently develop similar technology. If we are unable to protect our trademarks and other proprietary rights against unauthorized use by others, our reputation and brand name may be damaged and our competitive position may be significantly harmedIF WE MAKE ACQUISITIONS OR STRATEGIC INVESTMENTS, OUR STOCKHOLDERS COULD BE DILUTED, WE COULD INCUR ADDITIONAL DEBT, AND WE COULD ASSUME ADDITIONAL CONTINGENT LIABILITIES We intend to consider investments in complementary companies, products or technologies. While we have no current agreements to do so, we may buy businesses, products or technologies in the future. If we make an acquisition or investment, we may: - issue stock that would dilute your stock ownership; - incur debt which would restrict our cash flow; - assume liabilities which may result in additional costs; - incur amortization expenses related to goodwill and other intangible assets; or - incur large and immediate write-offsWE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OR MANAGE THE ACQUISITIONS OR INVESTMENTS WE MAKE We have not completed any acquisitions or investments to date, so, as a company, we have no experience in this area. Therefore, acquisitions or investments made by us could involve numerous risks, including: - problems combining the purchased operations, technologies or products; - unanticipated costs; - diversion of management's attention from our core business; - adverse effects on existing business relationships with suppliers and customers; - risks associated with entering markets in which we have no or limited prior experience; and - potential loss of key employees, particularly those of the purchased organizationsWe may not be able to successfully integrate businesses, products, technologies or personnel that we might acquire in the future. Any failure to do so could disrupt our business and seriously harm our financial condition WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WHICH MAY NOT BE AVAILABLE At June 30, 2000, we had approximately $25.5 million in cash, cash equivalents and marketable securities. We believe that these amounts, combined with proceeds from this offering and cash anticipated to be available from future operations, will enable us to meet our working capital and capital expenditure requirements for at least the next 12 months. However, if cash from available sources is insufficient, or if cash is used to acquire complementary companies, products or technologies, or for other uses not presently planned, we may need additional capital. The development and marketing of new and enhanced products and the expansion of our sales channels and associated support personnel will require a significant commitment of 11 14 resources. In addition, if the market for broadband access solutions develops at a slower pace than anticipated or if we fail to establish significant market share and achieve a meaningful level of revenue, we may continue to incur significant operating losses and utilize significant amounts of capital. As a result, we could be required to raise substantial additional capital. Additional capital may not be available to us at all, or if available, may be available only on unfavorable terms. Any inability to raise additional capital when we require it would materially adversely affect our business, results of operations and financial condition. RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING STOCK MARKET VOLATILITY HAS INCREASED, MAKING YOUR INVESTMENT MORE RISKY The price at which our common stock will trade following this offering is likely to be highly volatile and may fluctuate substantially. The price of the common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control. In particular, given the limited amount of our product sales and our limited number of customers, the announcement of any significant customer developments, awards or losses or of any significant partnerships or acquisitions by us or our competitors could have a material adverse effect on our stock price. In addition, the stock markets, particularly the Nasdaq National Market, on which we expect our common stock to be listed, have experienced extreme price and volume fluctuations. These fluctuations have particularly affected the market prices of equity securities of technology related companies and have often been unrelated or disproportionate to the operating performance of those companiesTHE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE ACTIONS Immediately following this offering, our executive officers, directors and their affiliates will together own approximately 71% of our outstanding common stock. As a result, those stockholders, if they act together, will be able to determine the outcome of the vote on any matter requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stockSOME PROVISIONS OF OUR CHARTER AND BY-LAWS MAY DELAY OR PREVENT TRANSA 1 < 0.1%
 
RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be carefully considered in evaluating the Company and its business before purchasing any of the shares of Common Stock offered hereby. The Company cautions the reader that this list of risk factors may not be exhaustive. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated by such forward-looking statements as a result of certain factors, including the factors set forth below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus DEPENDENCE ON ACQUISITIONS OF ADDITIONAL RESORT UNITS FOR GROWTH; NEED FOR ADDITIONAL CAPITAL The Company purchases or develops resort units for WorldMark in exchange for the exclusive right to sell the Vacation Credits assigned to these unitsThe Company can only sell additional Vacation Credits to the extent that it acquires or develops additional resort units for WorldMark. The Company's future growth and financial success therefore will depend to a significant degree on the availability of attractive resort locations and the Company's ability to acquire and develop additional resort units on favorable terms and to obtain additional debt and equity capital to fund such acquisitions and developmentThere can be no assurance that the Company will be successful in this regard. As of June 30, 1997, the Company had purchase agreements and developments in progress to obtain 351 additional resort units by the end of 1998. No assurance can be given that all of such units will be acquired or completed on a timely basis or at all. There are numerous potential buyers of resort real estate competing to acquire resort properties which the Company may consider attractive resort acquisition opportunities, and many of these potential buyers are better capitalized than the Company. There can be no assurance that the Company will be able to compete against such other buyers successfully. When the Company purchases or develops a new resort or additional units at an existing WorldMark Resort, the Company causes the units to be conveyed directly to WorldMark free of any monetary encumbrances, and therefore must purchase its properties without any financing secured by the properties. Since the Company generally finances at least 85% of the aggregate purchase price of Vacation Credits sold to new Owners, it does not generate sufficient cash from sales to provide the necessary capital to acquire or develop additional resort units. Accordingly, the Company has a continuous need for capital to purchase additional resort units. Historically, the Company's primary source of capital has been the sale of Notes Receivable to a group of banks and a securitization, through one of the Finance Subsidiaries, of Notes Receivable to institutional investors. Effective June 30, 1997, Jeld-Wen transferred the ownership of the Finance Subsidiaries to the Company in exchange for 5,193,693 shares of the Company's Common Stock. See "Summary -- Corporate Background and Consolidation of Finance Subsidiaries." The Finance Subsidiaries' relationship with the participating banks is expected to continue following the Consolidation Transactions. No assurance can be given, however, that the Company will be able to obtain adequate debt or equity capital through the sale or securitization of its Notes Receivables, or otherwise, in order to continue to acquire additional properties or that such future financing can be obtained on terms favorable to the Company. See "Business -- Finance Subsidiaries" and "Certain Transactions -- Acquisition of Finance Subsidiaries." RISKS ASSOCIATED WITH DEVELOPMENT AND CONSTRUCTION ACTIVITIES The Company intends to expand its acquisition, development, construction and expansion of timeshare resorts. There can be no assurance that the Company will complete current or future development or expansion projects. Risks associated with these activities include the risks that (i) acquisition or development opportunities may be abandoned; (ii) construction costs may exceed original estimates, possibly making the development or expansion uneconomical or unprofitable; (iii) financing may not be available on favorable terms or at all; and (iv) construction may not be completed on schedule, resulting in increased interest expense and delays in the availability for sale of Vacation CreditsDevelopment activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, the ability of the Company to 10 11 coordinate construction activities with the process of obtaining such permits and authorizations, and the ability of the Company to obtain the financing necessary to complete the necessary acquisition, construction and conversion work. In addition, the Company's construction activities are generally performed by third-party contractors. These third-party contractors generally control the timing, quality and completion of the construction activities. Nevertheless, construction claims may be asserted against the Company for construction defects and such claims may give rise to liabilities. New development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. The ability of the Company to expand its business to include new resorts will in part depend upon the availability of suitable properties at reasonable prices and the availability of financing for the acquisition and development of such properties. In the future, the Company may undertake the development of larger resort complexes. No assurance can be given that any such larger resort complexes will be developed in a profitable manner, if at allFACTORS AFFECTING SALES VOLUME As the number of potential customers in the geographic area of a sales office who have attended a sales presentation increases, the Company may have increasing difficulty in attracting additional potential customers to a sales presentation at that office and it may become increasingly difficult for the Company to maintain current sales levels at its existing sales officesAccordingly, the Company anticipates that a substantial portion of its future sales growth will depend on the opening of additional off-site sales offices The Company intends to open an additional off-site sales office in California in late 1997. No assurance can be given, however, that sales from existing or new off-site sales offices will meet management's expectations. If the Company does not open additional sales offices or if existing or new sales offices do not perform as expected, the Company's business, results of operations and financial condition could be materially adversely affectedGEOGRAPHIC CONCENTRATION ON WEST COAST The Company presently sells Vacation Credits in Washington, Oregon and California, primarily to residents of those states and of British Columbia. The Company intends to continue to sell Vacation Credits in these three states and to increase the number of its off-site sales offices in California. Since all of the Company's sales offices are in the western United States, any economic downturn in this area of the country could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the appeal of becoming an Owner may decrease if residents of Washington, Oregon, California and British Columbia do not continue to view the locations of WorldMark's Resorts (which are primarily located in these areas) as attractive vacation destinationsGENERAL ECONOMIC CONDITIONS; CONCENTRATION IN TIMESHARE INDUSTRY Any downturn in economic conditions or significant price increases or adverse events related to the travel and tourism industry, such as the cost and availability of fuel, could depress discretionary consumer spending and have a material adverse effect on the Company's business, results of operations and financial condition. Any such economic conditions, including recession, may also adversely affect the future availability of attractive financing rates for the Company or its customers and may materially adversely affect the Company's business. Furthermore, adverse changes in general economic conditions may adversely affect the collectibility of the Notes Receivable. Because the Company's operations are conducted solely within the timeshare industry, any adverse changes affecting the timeshare industry, such as a reduction in demand for timeshare units, changes in travel and vacation patterns, an increase of governmental regulation of the timeshare industry and increases in construction costs or taxes, as well as negative publicity for the timeshare industry, could have a material adverse effect on the Company's business, results of operations and financial conditionRISKS ASSOCIATED WITH CUSTOMER FINANCING In 1996, the Company provided financing for approximately 87% of the aggregate purchase price of Vacation Credits sold to new Owners, with an average new Note Receivable of approximately $7,500. The 11 12 Company also allows existing Owners the opportunity to finance the purchase of Upgrades. The Company obtains a security interest in the purchased Vacation Credits and it does not verify a prospective Owner's credit history. At June 30, 1997, an aggregate of $207.8 million of Notes Receivable were outstanding, of which approximately $65.3 million had been retained by the Company. The remaining balance of approximately $142.5 million of Notes Receivable had been sold by the Company prior to that date, although the Company retained limited recourse liability with respect to these Notes Receivable. See Notes 4, 5 and 15(a) of Notes to Combined and Consolidated Financial Statements. Notes Receivable become delinquent when a scheduled payment is 30 days or more past due and reservation privileges are suspended when a scheduled payment is 60 days or more past due. At June 30, 1997, approximately $3.8 million of Notes Receivable, including Notes Receivable previously sold by the Company, were past due 60 days or more. The Notes Receivable are secured by a security interest in the related Vacation Credits. The Company's practice has been to continue to accrue interest on Notes Receivable until such accounts are deemed uncollectible, at which time the Company writes off such Notes Receivable and records an expense for any interest that had been accrued, reclaims the related Vacation Credits that secure such Notes Receivable and returns such Vacation Credits to inventory available for resale. However, the associated marketing costs and sales commissions are not recovered by the Company and these expenses must be incurred again to resell the Vacation Credits. The Company maintains a reserve for doubtful accounts in respect of the Notes Receivable owned by the Company and a reserve for recourse liability in respect of the Notes Receivable that have been sold by the Company. The aggregate amount of these reserves at December 31, 1995 and 1996, and June 30, 1997 were $8.0 million, $11.2 million and $13.3 million, respectively, representing approximately 6.3%, 6.2% and 6.4%, respectively, of the total portfolio of Notes Receivable at those dates, including the Notes Receivable that had been sold by the Company. These reserves are estimates and if the amount of the Notes Receivable that is ultimately uncollectible materially exceeds the related reserves, the Company's business, results of operations and financial condition could be materially adversely affected. See "Business -- Customer Financing." INTEREST RATE RISK The Company generally provides financing for a significant portion of the aggregate purchase price of Vacation Credits sold at a fixed interest rate. In order to provide liquidity, the Company, through the Finance Subsidiaries, sells or securitizes its Notes Receivable. Although a significant portion of the existing financing of the Notes Receivable through the Finance Subsidiaries is at a fixed rate or at a variable rate with a cap on the maximum rate, if interest rates were to increase significantly, the Company's future cost of funds would also likely increase significantly. The Company has the ability to respond to rising interest rates by increasing the interest rate offered to finance Vacation Credit purchases. However, such an increase could have a material adverse effect on sales of Vacation Credits or on the percentage of Owners who finance their Vacation Credit purchases through the Company, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business -- Customer Financing" and "-- Finance Subsidiaries." COMPETITION The Company is subject to significant competition from other entities engaged in the business of resort development, sales and operation, including vacation interval ownership, condominiums, hotels and motels. Some of the world's most recognized lodging, hospitality and entertainment companies have begun to develop and sell vacation intervals in resort properties. Major companies that now operate or are developing or planning to develop vacation interval resorts include Marriott International, Inc. ("Marriott"), The Walt Disney Company ("Disney"), Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Four Seasons Hotels & Resorts, Inc. ("Four Seasons"), InterContinental Hotels and Resorts, Inc. ("Inter-Continental"), Westin Hotels & Resorts ("Westin") and Promus Hotels, Inc. ("Promus"). In addition, other publicly-traded companies in the timeshare industry, such as Signature Resorts, Inc. ("Signature"), Fairfield Communities, Inc. ("Fairfield") and Vistana, Inc. ("Vistana"), currently compete, or may in the future compete, with the CompanyMany of these entities possess significantly greater financial, marketing and other 12 13 resources than those of the Company. Management believes that industry competition will be increased by recent and potential future consolidation in the timeshare industry. The Company has entered into marketing agreements with affiliates of its parent, Jeld-Wen, pursuant to which these affiliates may market Vacation Credits for their own account at Eagle Crest Resort in Redmond, Oregon and Running Y Resort in Klamath Falls, Oregon in exchange for their transfer to WorldMark of condominium units at those resorts. These sales activities are competitive with the Company's marketing activities, particularly in the Oregon and northern California markets. See "Certain Transactions -- Relationship with Jeld-Wen." Resales of Vacation Credits by Owners may compete with sales of Vacation Credits by the Company and may inhibit the Company's ability to increase the market price of Vacation Credits it sellsDEPENDENCE ON KEY PERSONNEL The Company's success depends to a large extent upon the experience and abilities of William F. Peare, the Company's President and Chief Executive Officer, Jeffery P. Sites, the Company's Executive Vice President and Chief Operating Officer, and Gary A. Florence, the Company's Vice President, Chief Financial Officer and Treasurer. The loss of the services of any one of these individuals could have a material adverse effect on the Company's business, results of operations and financial condition. Prior to the closing of the Offering, the Company intends to enter into employment agreements with MessrsPeare and Sites. The Company's success is also dependent upon its ability to attract and retain qualified development, acquisition, marketing, management, administrative and sales personnel for which there is keen competition. In addition, the cost of retaining such key personnel could escalate over time There can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Management -- Employment Agreements." APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION CREDITS It is possible that the Vacation Credits may be deemed to be a security as defined in Section 2(1) of the Securities Act of 1933, as amended (the "Securities Act"). If the Vacation Credits were determined to be a security for such purpose, their sale would require registration under the Securities ActThe Company has not registered the sale of the Vacation Credits under the Securities Act and does not intend to do so in the future. If the sale of the Vacation Credits were found to have violated the registration provisions of the Securities Act, purchasers of the Vacation Credits would have the right to rescind their purchases of Vacation Credits. If a substantial number of purchasers sought rescission and were successful, the Company's business, results of operations and financial condition could be materially adversely affected. The Company has been advised by its counsel, Foster Pepper & Shefelman PLLC, that in the opinion of such counsel, based on its review of the Company's Vacation Credit program and the sales practices utilized in such program, the Vacation Credits do not constitute a security within the meaning of Section 2(1) of the Securities ActREGULATION OF MARKETING AND SALES OF VACATION CREDITS; OTHER LAWS The Company's marketing and sales of Vacation Credits and certain of its other operations are subject to extensive regulation by the states and foreign jurisdictions in which the WorldMark Resorts are located and in which Vacation Credits are marketed and sold and also by the federal government. State and Provincial Regulations. Most U.S. states and Canadian provinces have adopted specific laws and regulations regarding the sale of vacation interval ownership programs. Washington, Oregon, California, Hawaii and British Columbia require the Company to register WorldMark Resorts, the Company's vacation program and the number of Vacation Credits available for sale in such state or province with a designated state or provincial authority. The Company must amend its registration if it desires to increase the number of Vacation Credits registered for sale in that state or province. Either the Company or the state or provincial authority assembles a detailed offering statement describing the Company and all material aspects of the project and sale of Vacation Credits. The Company is required to deliver the offering statement to all new purchasers of Vacation Credits, together with certain additional information concerning the terms of the 13 14 purchase. Hawaii imposes particularly stringent and broad regulation requirements for the sale of interests in interval ownership programs that have resort units located in Hawaii. The Company has incurred substantial expenditures over an extended period of time in the registration process in Hawaii and still has not completed this process. Hawaii has allowed the use of WorldMark units in Hawaii, provided that the Company continues in good faith to pursue registration in Hawaii. Laws in each state where the Company sells Vacation Credits grant the purchaser of Vacation Credits the right to cancel a contract of purchase at any time within a period ranging from three to seven calendar days following the later of the date the contract was signed or the date the purchaser received the last of the documents required to be provided by the Company. Most states have other laws which regulate the Company's activities, such as real estate licensure laws, laws relating to the use of public accommodations and facilities by disabled persons, sellers of travel licensure laws, anti-fraud laws, advertising laws and labor laws. Federal Regulations. The Federal Trade Commission has taken an active regulatory role in the interval ownership industry through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce. Other federal legislation to which the Company is or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Opportunity Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate Standards Practices Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Civil Rights Act of 1964 and 1968, the Fair Housing Act and the Americans with Disabilities Act. Although the Company believes that it is in material compliance with all federal, state, local and foreign laws and regulations to which it is currently subject, there can be no assurance that it is in fact in compliance. Any failure by the Company to comply with applicable laws or regulations could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company will continue to incur significant costs to remain in compliance with applicable laws and regulations, and such costs could increase substantially in the futureDEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORK; NO ASSURANCE OF CONTINUED PARTICIPATION The attractiveness of purchasing Vacation Credits is enhanced by the ability of Owners to exchange Vacation Credits for an occupancy right in a resort participating in the RCI network. RCI provides broad-based vacation interval exchange services, and, subject to payment of a fee to RCI, Owners are permitted to exchange their Vacation Credits for vacation use among the resorts which participate in the RCI network. However, no assurance can be given that the Company will continue to be able to ensure that Owners will be eligible to participate in the RCI network or that the weekly RCI exchange value for Vacation Credits will not become less favorable to Owners. Moreover, if the RCI exchange network ceases to function effectively, or if Vacation Credits are not accepted as exchanges for other desirable resorts, the Company's sales of Vacation Credits could be materially adversely affected. See "Business -- Participation in Vacation Interval Exchange Network." POSSIBLE ENVIRONMENTAL LIABILITIES Under various federal, state, local and foreign laws, ordinances and regulations, the owner or operator of real property generally is liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Other federal and state laws require the removal or encapsulation of asbestos-containing material when such material is in poor condition or in the event of construction, demolition, remodeling or renovation. Other statutes may require the removal of underground storage tanks. Noncompliance with these and other environmental, health or safety requirements may result in the need to cease or alter operations at a property. Although the Company conducts an environmental assessment with respect to the properties it acquires for WorldMark, the Company has not received a Phase I environmental report for any WorldMark Resort. There can be no assurance that any environmental assessments undertaken by the Company with respect to the WorldMark Resorts have revealed all potential environmental liabilities, or that an environmental condition does not otherwise exist as to any one 14 15 or more of the WorldMark Resorts that could have a material adverse effect on the Company's business, results of operations and financial conditionNATURAL DISASTERS; UNINSURED LOSS WorldMark maintains property insurance and liability insurance for the units at the WorldMark Resorts, with certain policy specifications, insured limits and deductibles. Certain types of losses, such as losses arising from earthquakes, floods or acts of war, are generally excluded from WorldMark's insurance coverage. Should an uninsured loss or loss in excess of insured limits occur, WorldMark has the option to either (i) remove such units from the Vacation Credit system, which would result in a proportionate dilution of vacation time available for the Vacation Credits which have been sold, or (ii) pay the related costs of replacement. Although WorldMark's board of directors may impose a limited amount of special assessments to pay for capital improvements or major repairs, there can be no assurance that WorldMark would be able to increase assessments to provide sufficient funds to pay for all possible capital improvements and major repairs of the units at the WorldMark Resorts. In such an event, the Company may need to advance funds to WorldMark in order to maintain the quality of the WorldMark Resorts or WorldMark may be required to defer certain improvements or repairs. In addition, the Company may advance funds to WorldMark if WorldMark does not have sufficient funds to pay its obligations in a timely manner. See "Business -- Insurance; Legal Proceedings." EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDER; ANTITAKEOVER PROVISIONS Upon closing of the Offering, Jeld-Wen will own 79.98% of the outstanding shares of Common Stock. This concentration of ownership will give Jeld-Wen control of the election of directors and the management and affairs of the Company and sufficient voting power to determine the outcome of all matters submitted to the stockholders for approval, including mergers, consolidations and the sale of all, or substantially all, of the Company's assets. In addition, certain provisions of Oregon law and of the Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. In addition, the Company is authorized to issue Preferred Stock with rights senior to, and that may adversely affect, the Common Stock, with such rights, preferences and privileges as the Company's Board of Directors may determine, without the necessity of stockholder approval. The Company, however, has no present plans to issue any shares of Preferred Stock. See "Principal and Selling Stockholders," "Description of Capital Stock" and "Certain Provisions of Oregon Law and of Trendwest's Articles of Incorporation and Bylaws." SHARES ELIGIBLE FOR FUTURE SALE Upon closing of the Offering, all of the shares of Common Stock offered hereby will be eligible for public sale without restriction. Holders of the other 14,287,116 shares of Common Stock hold their shares subject to the limitations of Rule 144 of the Securities Act. All holders of these shares have entered into lock-up agreements with the Underwriters not to offer, sell or otherwise dispose of any equity securities of the Company for 360 days after the date of this Prospectus, in the case of Jeld-Wen and the Selling Stockholder, and 180 days after the date of this Prospectus in the case of all other holders, without the prior written consent of Montgomery Securities. Montgomery Securities may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements during the respective lock-up periods. Future sales of substantial amounts of Common Stock, or the potential for such sales, could adversely affect prevailing market prices. See "Shares Eligible for Future Sale" and "Underwriting." IMMEDIATE AND SUBSTANTIAL DILUTION; NO ANTICIPATED DIVIDENDS Purchasers of Common Stock in the Offering will experience immediate dilution in pro forma net tangible book value per share of Common Stock of $11.92 from the initial public offering price per share. See "Dilution." In addition, the Company does not anticipate that it will pay any cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." 15 16 ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE There has been no prior public market for the Company's Common StockAlthough the Common Stock has been approved for quotation on the Nasdaq National Market, there can be no assurance that a viable public market for the Common Stock will develop or be sustained after the Offering or that purchasers of the Common Stock will be able to resell their Common Stock at prices equal to or greater than the initial public offering price. The initial public offering price was determined by negotiations among the Company, the Selling Stockholder and the representatives of the Underwriters and may not be indicative of the prices that may prevail in the public market after the Offering is completedNumerous factors, including announcements of fluctuations in the Company's or its competitors' operating results and market conditions for hospitality and timeshare industry stocks in general, could have a significant impact on the future price of the Common Stock. In addition, the stock market in recent years has experienced significant price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many growth companies, and have often been unrelated or disproportionate to the operating performance of these specific companies. These broad fluctuations may adversely affect the market price of the Common Stock. See "Underwriting." 16 1 < 0.1%
 
risk factors investing in our common stock involves a high degree of risk. you should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. if any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. in that case, the trading price of our common stock could decline, and you may lose some or all of your investment. risks related to our businesswe have no operating history and may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders. we were organized as a delaware corporation on june3, 2009, but have had no operations since that time. we filed a certificate of dissolution in delaware on may5, 2010 and revoked such dissolution by filing a certificate of revocation of dissolution on march24, 2011. we have no operating history. we have no assets and will commence operations only upon completion of this offering and the concurrent private placements. we cannot assure you that we will be able to operate our business successfully or implement our operating policies and strategies as described in this prospectus. the results of our operations depend on several factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and economic conditions.we may change any of our strategies, policies or procedures without stockholder consent. we may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization, distributions, financing strategy and leverage at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. a change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this prospectus. these changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.we have not yet identified any specific investments we may make with the net proceeds of this offering. we have not yet identified any specific investments we may make with the net proceeds of this offering and as a result, you will not be able to evaluate any proposed investments before purchasing shares of our common stock. additionally, our investments will be selected by our manager and our stockholders will not have input into such investment decisions. both of these factors will increase the uncertainty, and thus the risk, of investing in shares of our common stock. until appropriate investments can be identified, our manager may invest the net proceeds of this offering and the concurrent private placements in interest-bearing short-term investments, including money market accounts and/or funds, that are consistent with our intention to qualify as a reit. these initial investments, if any, are expected to provide a lower net return than we will seek to achieve from investments in agency rmbs. we anticipate that we will be able to identify a sufficient amount of investments in agency rmbs within approximately one to two months after the closing of this offering and the concurrent private placements. however, depending on the availability of appropriate investment opportunities and subject to prevailing market conditions, there can be no assurance that we will be able to identify a sufficient amount of investments within this timeframe. see "use of proceeds." our manager intends to conduct due diligence with respect to each investment and suitable investment opportunities may not be immediately available. even if opportunities are available, there can be no assurance that our manager's due diligence processes will uncover all relevant facts or that any investment will be successful. furthermore, you will be unable to evaluate the manner in which the net proceeds of this offering and the concurrent private placements will be invested or the economic merit of our expected investments and, as a result, we may use the net proceeds from these offerings to make investments with which you may not agree. the failure of our management to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns, could cause a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders, and could cause the value of our common stock to decline. risks related to our investing strategymortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, agency rmbs and our potential target assets. the u.s. government, through the u.s. federal reserve, the federal housing administration, or the fha, and the federal deposit insurance corporation, has implemented a number of federal programs designed to assist homeowners, including the home affordable modification program, or hamp, which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, the hope for homeowners program, or h4h program, or harp, which allows certain distressed borrowers to refinance their mortgages into fha-insured loans in order to avoid residential mortgage loan foreclosures, and the home affordable refinance program, which allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments at loan-to-value ratios up to 125% (and, in some cases, above 125%) without new mortgage insurance. hamp, the h4h program and other loss mitigation programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or the extension of payment terms of the loans. in september 2011, the white house announced they are working on a major plan to allow certain homeowners who owe more on their mortgages than their homes are worth to refinance. in october 2011, the fhfa announced changes to the harp to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the harp loan-to-value ratio above 125%. however, this would only apply to mortgages guaranteed by the u.s. government-sponsored entities. there are many challenging issues to this proposal, notably the question as to whether a loan with a loan-to-value ratio of 125% qualifies as a mortgage or an unsecured consumer loan. the chances of this initiative's success have created additional uncertainty in the agency rmbs market, particularly with respect to possible increases in prepayment rates. on january4, 2012, the u.s. federal reserve issued a white paper outlining additional ideas with regard to refinancings and loan modifications. it is likely that loan modifications would result in increased prepayments on some agency rmbs. especially with non-agency rmbs, a significant number of loan modifications with respect to a given security, including, but not limited to, those related to principal forgiveness and coupon reduction, resulting in increased prepayment rates, could negatively impact the realized yields and cash flows on such security. these loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with the federal national mortgage association, or fnma, the federal home loan mortgage corporation, or fhlmc, or the government national mortgage association, or gnma, may adversely affect the value of, and the returns on, agency rmbs and our potential target assets that we may purchase.actions of the u.s. government, including the u.s. congress, federal reserve, u.s. treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market responses to those actions, may not achieve the intended effect and may adversely affect our business. in response to the financial issues affecting the banking system and financial markets and going concern threats to commercial banks, investment banks and other financial institutions, the emergency economic stabilization act, or eesa, was enacted by the u.s. congress in 2008. there can be no assurance that the eesa or any other u.s. government actions will have a beneficial impact on the financial markets. to the extent the markets do not respond favorably to any such actions by the u.s. government or such actions do not function as intended, our business may not receive the anticipated positive impact from the legislation and such result may have broad adverse market implications. in july 2010, the u.s. congress enacted the dodd frank wall street reform and consumer protection act, or the dodd-frank act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to u.s. financial markets. for instance, the dodd-frank act will impose significant restrictions on the proprietary trading activities of certain banking entities and subject other systemically significant organizations regulated by the u.s. federal reserve to increased capital requirements and quantitative limits for engaging in such activities. the dodd-frank act also seeks to reform the asset-backed securitization market (including the mortgage-backed securities market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. certain of the new requirements and restrictions exempt agency rmbs, other government issued or guaranteed securities, or other securities. nonetheless, the dodd-frank act also imposes significant regulatory restrictions on the origination of residential mortgage loans. while the full impact of the dodd-frank act cannot be assessed until all implementing regulations are released, the dodd-frank act's extensive requirements may have a significant effect on the financial markets, and may affect the availability or terms of financing from our lender counterparties and the availability or terms of mortgage-backed securities, both of which may have an adverse effect on our financial condition and results of operations. in addition, the u.s. government, federal reserve, u.s. treasury and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. we cannot predict whether or when such actions may occur or what effect, if any, such actions could have on our business, results of operations and financial condition.the federal conservatorship of fnma and fhlmc and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the u.s. government, may adversely affect our business. the payments of principal and interest we receive on our agency rmbs, which depend directly upon payments on the mortgages underlying such securities, are guaranteed by fnma, fhlmc and gnma. fnma and fhlmc are u.s. government-sponsored entities, or gses, but their guarantees are not backed by the full faith and credit of the united states. gnma is part of a u.s. government agency and its guarantees are backed by the full faith and credit of the united states. in response to general market instability and, more specifically, the financial conditions of fnma and fhlmc, in july 2008, the housing and economic recovery act of 2008, or hera, established a new regulator for fnma and fhlmc, the u.s. federal housing finance agency, or the fhfa. in september 2008, the u.s. treasury, the fhfa and the u.s. federal reserve announced a comprehensive action plan to help stabilize the financial markets, support the availability of mortgage financing and protect taxpayers. under this plan, among other things, the fhfa was appointed as conservator of both fnma and fhlmc, allowing the fhfa to control the actions of the two gses, without forcing them to liquidate, which would be the case under receivership. importantly, the primary focus of the plan was to increase the availability of mortgage financing by allowing these gses to continue to grow their guarantee business without limit, while limiting the size of their retained mortgage and agency security portfolios and requiring that these portfolios be reduced over time. although the u.s. government has committed to support the positive net worth of fnma and fhlmc through 2012, there can be no assurance that these actions will be adequate for their needs. these uncertainties lead to questions about the availability of, and trading market for, agency rmbs. despite the steps taken by the u.s. government, fnma and fhlmc could default on their guarantee obligations which would materially and adversely affect the value of our agency rmbs. accordingly, if these government actions are inadequate and the gses continue to suffer losses or cease to exist, our business, operations and financial condition could be materially and adversely affected. in addition, the problems faced by fnma and fhlmc resulting in their being placed into federal conservatorship and receiving significant u.s. government support have sparked serious debate among federal policy makers regarding the continued role of the u.s. government in providing liquidity for mortgage loans. the future roles of fnma and fhlmc could be significantly reduced and the nature of their guarantee obligations could be considerably limited relative to historical measurements. any such changes to the nature of their guarantee obligations could redefine what constitutes an agency security and could have broad adverse implications for the market and our business, operations and financial condition. if fnma or fhlmc were eliminated, or their structures were to change radically (i.e., limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, we could be unable to acquire additional agency rmbs and our existing agency rmbs could be materially and adversely impacted. we could be negatively affected in a number of ways depending on the manner in which related events unfold for fnma and fhlmc. we will rely on our agency rmbs (as well as non-agency rmbs) as collateral for our financings under the repurchase agreements that we intend to enter into upon the completion of this offering. any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on our agency rmbs on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions. further, the current support provided by the u.s. treasury to fnma and fhlmc, and any additional support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from agency rmbs, thereby tightening the spread between the interest we earn on our agency rmbs and the cost of financing those assets. a reduction in the supply of agency rmbs could also negatively affect the pricing of agency rmbs by reducing the spread between the interest we earn on our investment portfolio of agency rmbs and our cost of financing that portfolio. as indicated above, recent legislation has changed the relationship between fnma and fhlmc and the u.s. government. future legislation could further change the relationship between fnma and fhlmc and the u.s. government, and could also nationalize, privatize, or eliminate such entities entirely. any law affecting these gses may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by fnma or fhlmc. as a result, such laws could increase the risk of loss on our investments in agency rmbs guaranteed by fnma and/or fhlmc. it also is possible that such laws could adversely impact the market for such securities and spreads at which they trade. all of the foregoing could materially and adversely affect our financial condition and results of operations. we will be subject to the risk that u.s. government agencies and/or gses may not be able to fully satisfy their guarantees of agency rmbs or that these guarantee obligations may be repudiated, which may adversely affect the value of our assets and our ability to sell or finance these securities. the interest and principal payments we will receive on the agency rmbs in which we intend to invest will be guaranteed by fnma, fhlmc or the gnma. unlike the gnma securities in which we may invest, the principal and interest on securities issued by fnma and fhlmc are not guaranteed by the u.s. government. all the agency rmbs in which we intend to invest depend on a steady stream of payments on the mortgages underlying the securities. as conservator of fnma and fhlmc, the fhfa may disaffirm or repudiate contracts (subject to certain limitations for qualified financial contracts) that fhlmc or fnma entered into prior to the fhfa's appointment as conservator if it determines, in its sole discretion, that performance of the contract is burdensome and that disaffirmation or repudiation of the contract promotes the orderly administration of its affairs. the hera requires the fhfa to exercise its right to disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator. fnma and fhlmc have disclosed that the fhfa has disaffirmed certain consulting and other contracts that these entities entered into prior to the fhfa's appointment as conservator. fhlmc and fnma have also disclosed that the fhfa has advised that it does not intend to repudiate any guarantee obligation relating to fnma and fhlmc's mortgage-related securities, because the fhfa views repudiation as incompatible with the goals of the conservatorship. in addition, the hera provides that mortgage loans and mortgage-related assets that have been transferred to a fhlmc or fnma securitization trust must be held for the beneficial owners of the related mortgage-related securities, and cannot be used to satisfy the general creditors of fhlmc or fnma. if the guarantee obligations of fhlmc or fnma were repudiated by fhfa, payments of principal and/or interest to holders of agency rmbs issued by fhlmc or fnma would be reduced in the event of any borrowers' late payments or failure to pay or a servicer's failure to remit borrower payments to the trust. in that case, trust administration and servicing fees could be paid from mortgage payments prior to distributions to holders of agency rmbs. any actual direct compensatory damages owed due to the repudiation of fhlmc or fnma's guarantee obligations may not be sufficient to offset any shortfalls experienced by holders of agency rmbs. fhfa also has the right to transfer or sell any asset or liability of fhlmc or fnma, including its guarantee obligation, without any approval, assignment or consent. if fhfa were to transfer fhlmc or fnma's guarantee obligations to another party, holders of agency rmbs would have to rely on that party for satisfaction of the guarantee obligation and would be exposed to the credit risk of that party.we operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in agency rmbs and our potential target assets and could also affect the pricing of these securities. we operate in a highly competitive market for investment opportunities. our profitability depends, in large part, on our ability to acquire agency rmbs and our potential target assets at attractive prices. in acquiring these assets, we will compete with a variety of institutional investors, including other reits, specialty finance companies, public and private funds (including other funds managed by our manager), commercial and investment banks, commercial finance and insurance companies and other financial institutions. many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. several other reits have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the u.s. government. many of our competitors are not subject to the operating constraints associated with reit tax compliance or maintenance of an exemption from the 1940 act. in addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. furthermore, competition for investments in agency rmbs and our potential target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. we cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. also, as a result of this competition, desirable investments in these assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.the lack of liquidity in our investments may adversely affect our business. we expect that the assets that we will acquire will not be publicly traded. a lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. in addition, mortgage-related assets generally experience periods of illiquidity, including the recent period of delinquencies and defaults with respect to residential and commercial mortgage loans. the illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. in addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our manager has or could be attributed with material, non-public information regarding such business entity. as a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.adverse developments in the broader residential mortgage market may adversely affect the value of the assets in which we intend to invest. since 2007, the residential mortgage market in the united states has experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market. these losses reduced financial industry capital, leading to reduced liquidity for some institutions. these factors have impacted investor perception of the risk associated with real estate-related assets, including agency rmbs and other high-quality rmbs assets. as a result, values for rmbs assets, including some agency rmbs and other aaa-rated rmbs assets, have experienced a certain amount of volatility. further increased volatility and deterioration in the broader residential mortgage and rmbs markets may adversely affect the performance and market value of the agency and non-agency rmbs in which we intend to invest. we intend to invest in agency rmbs and non-agency rmbs. we will need to rely on our securities as collateral for our financings. any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. the securities we intend to acquire will be classified for accounting purposes as available-for-sale. all assets classified as available-for-sale will be reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. as a result, a decline in fair values may reduce the book value of our assets. moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such decline will reduce earnings. if market conditions result in a decline in the fair value of our assets, our financial position and results of operations could be adversely affected.a prolonged economic recession and further declining real estate values could impair our assets and harm our operations. the risks associated with our business are more severe during economic recessions and are compounded by declining real estate values. the non-agency rmbs in which we may invest a part of our capital will be particularly sensitive to these risks. declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential real estate weakens further. further, declining real estate values significantly increase the likelihood that we will incur losses on non-agency rmbs in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from non-agency rmbs in our portfolio, which could have an adverse effect on our financial condition, results of operations and our ability to make distributions to our stockholders.our investments in non-agency rmbs are generally subject to losses. we may acquire non-agency rmbs. in general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or b-note, if any, then by the "first loss" subordinated security holder and then by the holder of a higher-rated security. in the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or b-notes, and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase. in addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related non-agency rmbs. the prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.the mortgage loans underlying the non-agency rmbs that we may acquire will be subject to defaults, foreclosure timeline extension, fraud and residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to us. our potential investments in non-agency rmbs will be subject to the risks of defaults, foreclosure timeline extension, fraud and home price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, accompanying the underlying residential mortgage loans. the ability of a borrower to repay a mortgage loan secured by a residential property is dependent upon the income or assets of the borrower. a number of factors may impair borrowers' abilities to repay their loans, including: adverse changes in national and local economic and market conditions; changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; costs of remediation and liabilities associated with environmental conditions such as indoor mold; the potential for uninsured or under-insured property losses; acts of god, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on september11, 2001. in the event of defaults on the residential mortgage loans that underlie our investments in non-agency rmbs and the exhaustion of any underlying or any additional credit support, we may not realize our anticipated return on our investments and we may incur a loss on these investments. in addition, our investments in non-agency rmbs will be backed by residential real property but, in contrast to agency rmbs, their principal and interest will not be guaranteed by a u.s. government agency or a gse. the ability of a borrower to repay these loans or other financial assets is dependent upon the income or assets of these borrowers.we may be affected by alleged or actual deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process. allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents used in foreclosure proceedings (so-called "robo signing"), inadequate documentation of transfers and registrations of mortgages and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization and failure to enforce put-backs. as a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. in late 2010, a group of state attorneys general and state bank and mortgage regulators representing nearly all 50 states and the district of columbia, along with the u.s. justice department and the department of housing and urban development, began an investigation into foreclosure practices of banks and servicers. the investigations and lawsuits by several state attorneys general led to a proposed settlement agreement in early february 2012 with five of the nation's largest banks, pursuant to which the banks agreed to pay more than $25billion to settle claims relating to improper foreclosure practices. the proposed settlement does not prohibit the states, the federal government, individuals or investors in rmbs from pursuing additional actions against the banks and servicers in the future. the integrity of the servicing and foreclosure processes are critical to the value of the mortgage loan portfolios underlying the rmbs in which we intend to invest, and our financial results could be adversely affected by deficiencies in the conduct of those processes. for example, delays in the foreclosure process that have resulted from investigations into improper servicing practi 1 < 0.1%
 
RISK FACTORS You should consider carefully the risks and uncertainties described below and other information included in this prospectus before you decide to buy our common stock. If any of the risks described below occur, our business, financial condition or results of operations could be adversely affected in a material way. This could cause the value of our common stock to decline, perhaps significantly, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS IF WE ARE UNABLE TO PROFITABLY OPEN AND OPERATE NEW STORES AND MAINTAIN THE PROFITABILITY OF OUR EXISTING STORES, WE MAY NOT BE ABLE TO ADEQUATELY IMPLEMENT OUR GROWTH STRATEGY RESULTING IN A DECREASE IN NET SALES AND NET INCOME. One of our strategies is to open new stores by focusing on both existing markets and by targeting new geographic markets. We have opened 100 new stores since the beginning of fiscal 1997. We intend to open approximately 15 new stores in fiscal 2002 and approximately 35 new stores in fiscal 2003, and our future operating results will depend to a substantial extent upon our ability to open and operate new stores successfully. To date we have signed leases for six new stores in fiscal 2002, two of which have already opened, and we have identified sites for three new stores that we intend to open in fiscal 2003. We also have an ongoing expansion, remodeling and relocation program, and intend to expand, remodel or relocate four stores in fiscal 2002. There can be no assurance that we will be able to open, expand, remodel and relocate stores at this rate, or at all. Our ability to open new stores and to expand, remodel and relocate existing stores depends on a number of factors, including our ability to: - obtain adequate capital resources for leasehold improvements, fixtures and inventory on acceptable terms, or at all; - locate and obtain favorable store sites and negotiate acceptable lease terms; - construct or refurbish store sites; - obtain and distribute adequate product supplies to our stores; - maintain adequate warehousing and distribution capability at acceptable costs; - hire, train and retain skilled managers and personnel; and - continue to upgrade our information and other operating systems to control the anticipated growth and expanded operations. The rate of our expansion will also depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital. There can be no assurance that we will be able to obtain equity or debt capital on acceptable terms or at all. Moreover, our new senior credit facility contains provisions that restrict the amount of debt we may incur in the future. In addition, the cost of opening, expanding, remodeling and relocating new or existing stores may increase in the future compared to historical costs. The increased cost could be material. If we are not successful in obtaining sufficient capital, we may be unable to open additional stores or expand, remodel and relocate existing stores as planned, which may adversely affect our growth strategy resulting in a decrease in net sales. As a result, there can be no assurances that we will be able to achieve our current plans for the opening of new stores and the expansion, remodeling or relocation of existing stores. There also can be no assurance that our existing stores will maintain their current levels of sales and profitability or that new stores will generate sales levels necessary to achieve store-level profitability, much less profitability comparable to that of existing stores. New stores that we open in our existing 9 markets may draw customers from our existing stores and may have lower sales growth relative to stores opened in new markets. New stores also may face greater competition and have lower anticipated sales volumes relative to previously opened stores during their comparable years of operations. New stores opened in new markets, where we are less familiar with the target customer and less well known, may face different or additional risks and increased costs compared to stores operated in existing markets. Also, stores opened in non-mall locations may require greater marketing costs in order to attract customer traffic. These factors, together with increased pre-opening expenses at our new stores, may reduce our average store contribution and operating margins. If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our net income could suffer. The success of our growth plan will be dependent on our ability to promote and/or recruit enough qualified district managers, store managers and sales associates to support the expected growth in the number of our stores, and the time and effort required to train and supervise a large number of new managers and associates may divert resources from our existing stores and adversely affect our operating and financial performance. Our operating expenses would also increase as a result of any increase in the minimum wage or other factors that would require increases in the compensation paid to our employeesTHE AGREEMENT GOVERNING OUR DEBT PLACES CERTAIN REPORTING AND CONSENT REQUIREMENTS ON US WHICH MAY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS IN ACCORD WITH OUR BUSINESS AND GROWTH STRATEGY. We entered into a new senior credit facility in May 2002. Our new senior credit facility contains a number of covenants requiring us to report to our lender or to obtain our lender's consent in connection with certain activities we may wish to pursue in the operation of our business. These requirements may affect our ability to operate our business and consummate our business and growth strategy, and may limit our ability to take advantage of potential business opportunities as they arise. These requirements affect our ability to, among other things: - incur additional indebtedness; - create liens; - pay dividends or make other distributions; - make investments; - sell assets; - enter into transactions with affiliates; - repurchase capital stock; and - enter into certain mergers and consolidations. The new credit facility has two financial covenants. One covenant requires us to maintain cash flow, net of capital expenditures, at levels varying between $17.2 million and $26.7 million each fiscal quarter based upon our projections taking into account the seasonality of our business. The other covenant requires us to keep our senior debt within a specified ratio of our cash flow ranging from 1.0:1.0 to 1.8:1.0 each fiscal quarter based upon our projections taking into account the seasonality of our business and our anticipated utilization of the revolving credit facility. Any failure to comply with these or other covenants would allow the lenders to accelerate repayment of their debt, prohibit further borrowing under the revolving portion of the credit facility, declare an event of default, take possession of their collateral or take other actions available to a secured senior creditor. If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may suffer. This could have a material adverse effect on the market value and marketability of our common stock. 10 WE MAY NOT BE ABLE TO SUCCESSFULLY ANTICIPATE CONSUMER TRENDS AND OUR FAILURE TO DO SO MAY LEAD TO LOSS OF CONSUMER ACCEPTANCE OF OUR PRODUCTS RESULTING IN REDUCED NET SALES. Our success depends on our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. If we fail to identify and respond to emerging trends, consumer acceptance of the merchandise in our stores and our image with our customers may be harmed, which could materially adversely affect our net sales. Additionally, if we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our gross profit and cash flow. Conversely, shortages of items that prove popular could reduce our net sales. In addition, a major shift in consumer demand away from home decor could also have a material adverse effect on our business, results of operations and financial conditionWE DEPEND ON A NUMBER OF VENDORS TO SUPPLY OUR MERCHANDISE, AND ANY DELAY IN MERCHANDISE DELIVERIES FROM CERTAIN VENDORS MAY LEAD TO A DECLINE IN INVENTORY WHICH COULD RESULT IN A LOSS OF NET SALES. We purchase our products from approximately 200 vendors with which we have no long-term purchase commitments or exclusive contracts. None of our vendors supplied more than 12% of our merchandise purchases during the 12 months ended May 4, 2002. Historically, we have retained our vendors and we have generally not experienced difficulty in obtaining desired merchandise from vendors on acceptable terms. However, our arrangements with these vendors do not guarantee the availability of merchandise, establish guaranteed prices or provide for the continuation of particular pricing practices. Our current vendors may not continue to sell products to us on current terms or at all, and we may not be able to establish relationships with new vendors to ensure delivery of products in a timely manner or on terms acceptable to us. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Also, our business would be adversely affected if there were delays in product shipments to us due to freight difficulties, strikes or other difficulties at our principal transport providers or otherwise. We have from time to time experienced delays of this nature. We are also dependent on vendors for assuring the quality of merchandise supplied to us. Our inability to acquire suitable merchandise in the future or the loss of one or more of our vendors and our failure to replace any one or more of them may harm our relationship with our customers resulting in a loss of net salesWE ARE DEPENDENT ON FOREIGN IMPORTS FOR A SIGNIFICANT PORTION OF OUR MERCHANDISE, AND ANY CHANGES IN THE TRADING RELATIONS AND CONDITIONS BETWEEN THE UNITED STATES AND THE RELEVANT FOREIGN COUNTRIES MAY LEAD TO A DECLINE IN INVENTORY RESULTING IN A DECLINE IN NET SALES, OR AN INCREASE IN THE COST OF SALES RESULTING IN REDUCED GROSS PROFIT. Many of our vendors are importers of merchandise manufactured in the Far East and India. While we believe that buying from vendors instead of directly from manufacturers reduces or eliminates the risks involved with relying on products manufactured abroad, our vendors are subject to those risks, and we remain subject to those risks to the extent that their effects are passed through to us by our vendors or cause disruptions in supply. These risks include changes in import duties, quotas, loss of "most favored nation" ("MFN") trading status with the United States for a particular foreign country, work stoppages, delays in shipments, freight cost increases, economic uncertainties (including inflation, foreign government regulations and political unrest) and trade restrictions (including the United States imposing antidumping or countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices). If any of these or other factors were to cause a disruption of trade from the countries in which the suppliers of our vendors are located, our inventory levels may be reduced or the cost of our products may increase. We currently purchase a majority of our merchandise from importers of goods manufactured in China. China has been granted permanent normal trade relations by the United States effective January 1, 2002, based on its entry into the World Trade Organization ("WTO"), and now enjoys MFN trading statusChina's recent entry into the WTO potentially stabilizes the trading relationship between it and the 11 United States, but the possibility of trade disputes concerning merchandise currently imported from China continues to create risks. These risks could result in sanctions against China, and the imposition of new duties on certain imports from China, including products supplied to us. Any significant increase in duties or any other increase in the cost of the products imported for us from China could result in an increase in the cost of our products to our customers which may correspondingly cause a decrease in net sales, or could cause a reduction in our gross profit. Historically, instability in the political and economic environments of the countries in which our vendors obtain our products has not had a material adverse effect on our operations. However, we cannot predict the effect that future changes in economic or political conditions in such foreign countries may have on our operations. Although we believe that we could access alternative sources in the event of disruptions or delays in supply due to economic or political conditions in foreign countries on our vendors, such disruptions or delays may adversely affect our results of operations unless and until alternative supply arrangements could be made. In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad. Countries from which our vendors obtain these products may, from time to time, impose new or adjust prevailing quotas or other restrictions on exported products, and the United States may impose new duties, quotas and other restrictions on imported products. This could disrupt the supply of such products to us and adversely affect our operations. The United States Congress periodically considers other restrictions on the importation of products obtained for us by vendors. The cost of such products may increase for us if applicable duties are raised, or import quotas with respect to such products are imposed or made more restrictive. We are also subject to the risk that the manufacturers abroad who ultimately manufacture our products may employ labor practices that are not consistent with acceptable practices in the United States. In any such event we could be hurt by negative publicity with respect to those practices and, in some cases, face liability for those practicesOUR SUCCESS IS HIGHLY DEPENDENT ON OUR PLANNING AND CONTROL PROCESSES AND OUR SUPPLY CHAIN, AND ANY DISRUPTION IN OR FAILURE TO CONTINUE TO IMPROVE THESE PROCESSES MAY RESULT IN A LOSS OF NET SALES AND NET INCOME. An important part of our efforts to achieve efficiencies, cost reductions and net sales growth is the continued identification and implementation of improvements to our planning, logistical and distribution infrastructure and our supply chain, including merchandise ordering, transportation and receipt processing. We also need to ensure that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores. In particular, we may need to expand our existing infrastructure to the extent we open new stores in regions of the United States where we presently do not have stores. The cost of this enhanced infrastructure could be significantIn addition, a significant portion of the distribution to our stores is coordinated through our distribution facilities in Jackson, Tennessee. Any significant disruption in the operations of these facilities would have a material adverse effect on our ability to maintain proper inventory levels in our stores which could result in a loss of net sales and net incomeWE FACE AN EXTREMELY COMPETITIVE SPECIALTY RETAIL BUSINESS MARKET, AND SUCH COMPETITION COULD RESULT IN A REDUCTION OF OUR PRICES AND A LOSS OF OUR MARKET SHARE. The retail market is highly competitive. We compete against a diverse group of retailers, including specialty stores, department stores, discount stores and catalog retailers, which carry merchandise in one or more categories also carried by us. Our product offerings also compete with a variety of national, regional and local retailers, including such specialty retailers as Bed, Bath & Beyond, Cost Plus, Linens 'n Things, Michaels Stores, Pier 1 Imports and Williams-Sonoma. We also compete with these and other retailers for suitable retail locations, suppliers, qualified employees and management personnel. One or more of our competitors are present in substantially all of the malls in which we have stores. Many of our competitors are larger and have significantly greater financial, marketing and other resources than we do. This 12 competition could result in the reduction of our prices and a loss of our market share. Our sales are also impacted by store liquidations of our competitors. We believe that our stores compete primarily on the basis of merchandise quality and selection, price, visual appeal of the merchandise and the store and convenience of location. There can be no assurance that we will continue to be able to compete successfully against existing or future competition. Our expansion into the markets served by our competitors, and the entry of new competitors or expansion of existing competitors into our markets, may have a material adverse effect on our market share and could result in a reduction in our prices in order for us to remain competitiveOUR BUSINESS IS HIGHLY SEASONAL AND OUR FOURTH QUARTER CONTRIBUTES A DISPROPORTIONATE AMOUNT OF OUR OPERATING INCOME AND NET INCOME, AND ANY FACTORS NEGATIVELY IMPACTING US DURING OUR FOURTH QUARTER COULD REDUCE OUR NET SALES, NET INCOME AND CASH FLOW, LEAVING US WITH EXCESS INVENTORY AND MAKING IT MORE DIFFICULT FOR US TO FINANCE OUR CAPITAL REQUIREMENTS. We have experienced, and expect to continue to experience, substantial seasonal fluctuations in our net sales and operating results, which are typical of many mall-based specialty retailers and common to most retailers generallyDue to the importance of the fall selling season, which includes Thanksgiving and Christmas, the last quarter of our fiscal year has historically contributed, and is expected to continue to contribute, a disproportionate amount of our operating income and net income for the entire fiscal year. We expect this pattern to continue during the current fiscal year and anticipate that in subsequent fiscal years the last quarter of our fiscal year will continue to contribute disproportionately to our operating results. Any factors negatively affecting us during the last quarter of our fiscal year, including unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations, reducing our cash flow, leaving us with excess inventory and making it more difficult for us to finance our capital requirementsWE MAY EXPERIENCE SIGNIFICANT VARIATIONS IN OUR QUARTERLY RESULTS. Our quarterly results of operations may also fluctuate significantly based upon such factors as the timing of new store openings, pre-opening expenses associated with new stores, the relative proportion of new stores to mature stores, net sales contributed by new stores, increases or decreases in comparable store net sales, adverse weather conditions, shifts in the timing of holidays, the timing and level of markdowns, changes in fuel and other shipping costs, changes in our product mix and actions taken by our competitorsA PROLONGED ECONOMIC DOWNTURN COULD RESULT IN REDUCED NET SALES AND PROFITABILITY. Our net sales are also subject to a number of factors relating to consumer spending, including general economic conditions affecting disposable consumer income such as unemployment rates, business conditions, interest rates, levels of consumer confidence, energy prices, mortgage rates, the level of consumer debt and taxation. A weak retail environment could also adversely affect our net sales. Purchases of home decor items may decline during recessionary periods or a prolonged recession may have a material adverse effect on our business, financial condition and results of operations. In addition, economic downturns during the last quarter of our fiscal year could adversely affect us to a greater extent than if such downturns occurred at other times of the year. There is also no assurance that consumers will continue to focus on their homes or on home-oriented products or that trends in favor of "cocooning" and new home purchases will continueOUR COMPARABLE STORE NET SALES FLUCTUATE DUE TO A VARIETY OF FACTORS AND MAY NOT BE A MEANINGFUL INDICATOR OF FUTURE PERFORMANCE. Numerous factors affect our comparable store net sales results, including among others, weather conditions, retail trends, the retail sales environment, economic conditions, the impact of competition and our ability to execute our business strategy efficiently. Our comparable store net sales results have experienced fluctuations in the past. Our comparable store net sales increased 3.7% in fiscal 1999 over fiscal 1998, increased 0.6% in fiscal 2000 over fiscal 1999 and increased 13.3% in fiscal 2001 over the 13 53-week period ended February 3, 2001. In addition, we anticipate that opening new stores in existing markets may result in decreases in comparable store net sales for existing stores in such markets. Past comparable store net sales results may not be indicative of future results. Our comparable store net sales may not increase from quarter to quarter and may decline. As a result, the unpredictability of our comparable store net sales may cause our revenues and operating results to vary quarter to quarter, and an unanticipated decline in revenues or comparable store net sales may cause the price of our common stock to fluctuate significantlyREDUCED CONSUMER SPENDING IN THE SOUTHEASTERN PART OF THE UNITED STATES WHERE A MAJORITY OF OUR STORES ARE CONCENTRATED COULD REDUCE OUR NET SALES. Approximately 55% of our stores are located in the southeastern region of the United States. Consequently, economic conditions, weather conditions, demographic and population changes and other factors specific to this region may have a greater impact on our results of operations than on the operations of our more geographically diversified competitors. In addition, changes in regional factors that reduce the appeal of our stores and merchandise to local consumers could reduce our net salesWE ARE HIGHLY DEPENDENT ON CUSTOMER TRAFFIC IN MALLS, AND ANY REDUCTION IN THE OVERALL LEVEL OF MALL TRAFFIC COULD REDUCE OUR NET SALES AND INCREASE OUR SALES AND MARKETING EXPENSES. Substantially all of our existing stores are located in enclosed malls As a result, we largely rely on the ability of mall anchor tenants and other tenants to generate customer traffic in the vicinity of our storesHistorically, we have not relied on extensive media advertising and promotion in order to attract customers to our stores. Our future operating results will also depend on many other factors that are beyond our control, including the overall level of mall traffic and general economic conditions affecting consumer confidence and spending. Any significant reduction in the overall level of mall traffic could reduce our net salesOUR HARDWARE AND SOFTWARE SYSTEMS ARE VULNERABLE TO DAMAGE THAT COULD HARM OUR BUSINESS. We rely upon our existing management information systems for operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, as well as various financial functions. These systems and our operations are vulnerable to damage or interruption from: - fire, flood and other natural disasters; - power loss, computer systems failures, internet and telecommunications or data network failure, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data or security breaches, misappropriation and similar events; and - computer viruses. Any disruption in the operation of our management information systems, the loss of employees knowledgeable about such systems or our failure to continue to effectively modify such systems could interrupt our operations or interfere with our ability to monitor inventory, which could result in reduced net sales and affect our operations and financial performance. We also need to ensure that our systems are consistently adequate to handle our anticipated store growth and are upgraded as necessary to meet our needs. The cost of any such system upgrades or enhancements would be significantWE DEPEND ON KEY PERSONNEL, AND IF WE LOSE THE SERVICES OF ANY OF OUR PRINCIPAL EXECUTIVE OFFICERS, INCLUDING CARL KIRKLAND, OUR CHAIRMAN, AND ROBERT E ALDERSON, OUR CHIEF EXECUTIVE OFFICER, WE MAY NOT BE ABLE TO RUN OUR BUSINESS EFFECTIVELY. We have benefited substantially from the leadership and performance of our senior management, especially Carl Kirkland, our Chairman, and Robert EAlderson, our President and Chief Executive Officer. Our success will depend on our ability to retain our current management and to attract and retain 14 qualified personnel in the future. Competition for senior management personnel is intense and there can be no assurances that we will be able to retain our personnel. Although we maintain key man insurance in the amount of $3 million on each of Messrs. Kirkland and Alderson, the loss of the services of either of these individuals for any reason could have a material adverse effect on our business, financial condition and results of operations. In addition, the loss of certain of our other principal executive officers could affect our ability to run our business effectively. We have recently entered into new employment agreements with Mr. Kirkland and Mr. Alderson and other members of senior management. The employment agreements with Messrs. Kirkland and Alderson expire in June 2006 and continue on successive one-year renewal terms unless terminated by either party. The loss of a member of senior management would require the remaining executive officers to divert immediate and substantial attention to seeking a replacementTERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS. Terrorist attacks and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate, our operations and profitability and your investment. The potential near-term and long-term effects any terrorist or other attacks on the United States or U.S. businesses may have for our customers, the market for our common stock, the demand for merchandise sold by our stores and the U.S. economy are uncertainThe consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment OUR CHARTER AND BYLAW PROVISIONS AND CERTAIN PROVISIONS OF TENNESSEE LAW MAY MAKE IT DIFFICULT IN SOME RESPECTS TO CAUSE A CHANGE IN CONTROL OF KIRKLAND'S AND REPLACE INCUMBENT MANAGEMENT. Our charter authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by our Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of the holders of our common stock (including purchasers in this offering). Holders of the common stock will not have preemptive rights to subscribe for a pro rata portion of any capital stock which may be issued by us. In the event of issuance, such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Kirkland's. Although we have no present intention to issue any new shares of preferred stock, we may do so in the future. Our charter and bylaws contain certain corporate governance provisions that may make it more difficult to challenge management, may deter and inhibit unsolicited changes in control of Kirkland's and may have the effect of depriving our shareholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover. First, the charter provides for a classified Board of Directors, with directors (after the expiration of the terms of the initial classified board of directors in 2003, 2004 and 2005) serving three year terms from the year of their respective elections and being subject to removal only for cause and upon the vote of 80% of the voting power of all outstanding capital stock entitled to vote (the "Voting Power"). Second, our charter and bylaws do not generally permit shareholders to call, or require that the Board of Directors call, a special meeting. The charter and bylaws also limit the business permitted to be conducted at any such special meeting. In addition, Tennessee law permits action to be taken by the shareholders by written consent only if the action is consented to by holders of the number of shares required to authorize shareholder action and if all shareholders entitled to vote are parties to the written consent. Third, the bylaws establish an advance notice procedure for shareholders to nominate candidates for election as directors or to bring other business before meetings of the shareholders. Only those shareholder nominees who are nominated in accordance with this procedure will be eligible for election as directors of Kirkland's, and only such shareholder proposals may be considered at a meeting of shareholders as have been presented to Kirkland's in accordance with the procedure. Finally, the charter provides that the amendment or repeal of any of the foregoing provisions of the charter mentioned previously in this paragraph requires the affirmative vote of 15 at least 80% of the Voting Power. In addition, the bylaws provide that the amendment or repeal by shareholders of any bylaws made by our Board of Directors requires the affirmative vote of at least 80% of the Voting Power. Furthermore, Kirkland's is subject to certain provisions of Tennessee law, including certain Tennessee corporate takeover acts that are, or may be, applicable to us. These acts include the Investor Protection Act, the Business Combination Act and the Tennessee Greenmail Act, and these acts seek to limit the parameters in which certain business combinations and share exchanges occurThe charter, bylaws and Tennessee law provisions may have an anti-takeover effect, including possibly discouraging takeover attempts that might result in a premium over the market price for our common stock. See "Description of Capital Stock - Anti-Takeover Effect of Charter and Bylaw Provisions and Tennessee Laws." RISKS ASSOCIATED WITH THIS OFFERING WE WILL INCUR NON-CASH CHARGES IN PERIODS AFTER THIS OFFERING IS COMPLETED. We will incur non-cash charges in the second quarter of fiscal 2002, the quarter in which this offering is expected to be completed. These charges include a $1.6 million non-cash stock compensation charge related to the July 2001 grant of an option to a consultant to purchase shares of common stock; $600,000 of interest expense in connection with the inducement associated with the exchange of certain Class C Preferred Stock for common stock as a part of the Pre-Offering Transactions, and a $70,000 non-cash stock compensation charge related to the November 2001 grant of stock options to certain of our management employees. As a result of these charges and the fact that they are being incurred in the second fiscal quarter, in which we have historically realized net losses, we expect to incur a net loss for the quarter in which this offering is completed. We will continue to incur a $70,000 non-cash stock compensation charge related to the November 2001 grant of stock options each quarter through the third quarter of fiscal 2004. The recognition of these quarterly charges will result in a reduction of our net income or an increase in our net loss for each quarter through the third quarter of fiscal 2004AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP OR BE SUSTAINED, AND THE MARKET PRICE OF OUR COMMON STOCK MAY FALL BELOW THE INITIAL PUBLIC OFFERING PRICE. Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering, and the market price migh 1 < 0.1%
 
risk factors investing in our common stock involves a high degree of risk. you should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. the occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. in that case, the trading price of our common stock could decline, and you may lose all or part of your investment. risks related to our businessour near-term success is dependent on the success of our lead product candidate, silenortm (doxepin hydrochloride), and we cannot be certain that it will receive regulatory approval or be successfully commercialized. silenortm is currently being evaluated in two phaseiii clinical trials for the treatment of insomnia and will require the successful completion of these or other planned phaseiii clinical trials before we are able to submit a new drug application, or nda, to the u.s. food and drug administration, or fda, for approval. if our phaseiii or other clinical trials fail to demonstrate that silenortm is safe and effective, it will not receive regulatory approval. even if silenortm receives fda approval, it may never be successfully commercialized. in addition, we may have inadequate financial or other resources to pursue this product candidate through the clinical trial process or through commercialization. we do not have patent protection for silenortm in any jurisdiction outside the united states, which may limit our ability to commercialize silenortm. furthermore, the patent protection in the united states for silenortm for the treatment of insomnia is limited to lower dosages ranging from a lower limit of 0.5mg to various upper limits up to 20mg of its active ingredient, doxepin. doxepin is prescribed at dosages ranging from 75mg to 300mg daily for the treatment of depression and anxiety and is available in generic form in strengths as low as 10mg in capsule form as well as a concentrated liquid form dispensed by a marked dropper and calibrated for 5mg. as a result, we may face competition from the off-label use of these other dosage forms of generic doxepin. off-label use occurs when a drug that is approved by the fda for one indication is prescribed by physicians for a different, unapproved indication. if we are unable to obtain regulatory approval for, or are unable to successfully commercialize, silenortm, we may be unable to generate revenue, we may be unable to become profitable, and we may be unable to continue our operations.we expect intense competition in the insomnia marketplace for silenortm and in the target markets for our other product candidates, and new products may emerge that provide different and/or better therapeutic alternatives for the disorders that our product candidates are intended to treat. we are developing silenortm for the treatment of insomnia, which will compete with well established drugs for this indication including ambien and sonata, both gaba-acting hypnotics. recently, sepracor inc.s lunesta, a gaba-acting hypnotic, takeda pharmaceuticals north america, inc.s rozerem, a melatonin receptor antagonist, and sanofi-synthlabo inc.s ambien cr, a controlled-release formulation of the current product, ambien, were approved by the fda for the treatment of insomnia. an nda for at least one other product, neurocrine biosciences, inc.s indiplon, a gaba-acting hypnotic, has reportedly been submitted to the fda and is under review. furthermore, the patent for the original form of ambien, which accounted for $2.0billion of the $2.6billion insomnia market in 2004, expires in october 2006. as a result, generic versions of ambien are expected to reach the market shortly thereafter. generic versions of ambien can be expected to be priced significantly lower than approved, branded insomnia products. sales of all of these drugs may reduce the available market for, and the price we are able to charge for, any product developed by us for these indications. we are developing nalmefene for the treatment of pathological gambling. currently, there are no fda-approved products for this indication. however, controlled clinical trials using the opioid antagonist, naltrexone, which is available in generic form, have demonstrated clinical benefit for patients diagnosed with pathological gambling. additionally, some controlled clinical trials suggest that selective serotonin reuptake inhibitors, or ssris, such as glaxosmithkline plcs paxil and solvay pharmaceuticals, inc.s luvox, mayhave a potential clinical effect. topamax, marketed by ortho-mcneil neurologics, inc., is also being studied for the treatment of pathological gambling. we are developing acamprosate for the treatment of tardive dyskinesia. there are no fda-approved products for the treatment of tardive dyskinesia, although several companies are reportedly in phaseii and phaseiii clinical trials to evaluate product candidates for this condition. merck kgaa is investigating sarizotan hydrochloride, a serotonin 5ht1a agonist, in phaseiii clinical trials for treatment-associated dyskinesias in patients with parkinsons disease. additionally, juvantia pharma ltd. is investigating fipamezole, an adrenergic antagonist, in phaseii clinical trials for treatment-associated dyskinesias in parkinsons disease and acadia pharmaceuticals inc. is investigating acp-103, a 5-ht2a inverse agonist, in phase i clinical trials for levodopa-induced dyskinesias in patients with parkinsons disease. these product candidates may be approved by the fda or other regulatory authorities and commercialized ahead of acamprosate. the biotechnology and pharmaceutical industries are subject to rapid and intense technological change. we face, and will continue to face, competition in the development and marketing of our product candidates from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies. there can be no assurance that developments by others will not render silenortm or our other product candidates obsolete or noncompetitive. furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. these developments may render our product candidates obsolete or noncompetitive. compared to us, many of our potential competitors have substantially greater: capital resources; research and development resources, including personnel and technology; regulatory experience; preclinical study and clinical trial experience; expertise in prosecution of intellectual property rights; and manufacturing, distribution and sales and marketing experience. as a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. our competitors may also develop drugs that are more effective, useful and less costly than ours and may also be more successful than we in manufacturing and marketing their products. in addition, if we receive regulatory approvals for our products, manufacturing efficiency and marketing capabilities are likely to be significant competitive factors. we currently have no commercial manufacturing capability, sales force or marketing infrastructure. in addition, many of our competitors and potential competitors have substantially greater capital resources, research and development resources, manufacturing and marketing experience and production facilities than we. many of these competitors also have significantly greater resources for undertaking clinical trials of new pharmaceutical products and obtaining fda and other regulatory approvals.delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to generate revenues. delays in the commencement or completion of clinical testing could significantly affect our product development costs. we do not know whether planned clinical trials will begin on time or be completed onschedule, if at all. the commencement and completion of clinical trials can be delayed for a variety of reasons, including delays related to: obtaining regulatory approval to commence a clinical trial; reaching agreement on acceptable terms with prospective clinical research organizations, or cros, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different cros and trial sites; manufacturing sufficient quantities of a product candidate; obtaining institutional review board approval to conduct a clinical trial at a prospective site; recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues, or who are lost to further follow-up. in addition, a clinical trial may be suspended or terminated by us, the fda or other regulatory authorities due to a number of factors, including: failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols; inspection of the clinical trial operations or trial sites by the fda or other regulatory authorities resulting in the imposition of a clinical hold; unforeseen safety issues; or lack of adequate funding to continue the clinical trial. additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. amendments may require us to resubmit our clinical trial protocols to institutional review boards for reexamination, which may impact the costs, timing or successful completion of a clinical trial. if we experience delays in completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. in addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. even if we are able to ultimately commercialize our product candidates, other therapies for the same indications may have been introduced to the market and established a competitive advantage.our clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval. before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through preclinical testing and clinical trials that the product is safe and effective for use in each target indication. to date, we have not successfully completed any phaseiii clinical trials and we have not completed all planned preclinical and phasei clinical trials for each of our product candidates. for example, in addition to our ongoing phaseiii clinical trials for silenortm, we are undertaking several phasei clinical trials to evaluate the effect of food on the absorption of the drug and the effect of silenortm when co-administered with other drugs. with regard to nalmefene, we plan to initiate a clinical trial evaluating the product candidates effect on the electrocardiogram. with regard to acamprosate, various preclinical and phasei clinical trials are planned to facilitate the selection and evaluation of a formulation for the product candidate to be tested in subsequent trials. the results from preclinical testing and clinical trials that we have completed may not be predictive of results obtained in future preclinical and clinical trials, and there can be no assurance that we will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or result in marketable products. a number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. if our drug candidates are not shown to be safe and effective in clinical trials, the resulting delays in developing othercompounds and conducting related preclinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition and results of operations.our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization. undesirable side effects caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the fda or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale. for example, in a phasei clinical trial of nalmefene performed by our licensor, two patients were reported by the investigator to have a prolonged qtc interval, which is an electrocardiogram change which, if significantly prolonged, may result in an abnormal heart rhythm with adverse consequences including fainting, dizziness, loss of consciousness and death. in a final report, based on corrected values as determined by the cardiologist responsible for the central laboratory evaluation, these qtc findings were determined to be within the normal range of variation and incorrectly designated as adverse events. as with most new drugs, a phasei clinical trial to evaluate the effect of nalmefene on the electrocardiogram is planned and we will continue to assess the side effect profile of nalmefene and our other product candidates in our ongoing clinical development program. in addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product: regulatory authorities may require the addition of labeling statements, such as a black box warning in the case of silenortm or a contraindication; regulatory authorities may withdraw their approval of the product; we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product; and our reputation may suffer. any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from its sale. additionally, the fda has directed manufacturers of all antidepressant drugs to revise their product labels to include a black box warning and expanded warning statements regarding an increased risk of suicidal thinking and behavior in children and adolescents being treated with these agents. silenortms active ingredient, doxepin, is used in the treatment of depression and the package insert includes such a black box warning statement. although silenortm is not intended to be indicated for or used in the treatment of depression and our proposed insomnia dosage is less than one-tenth of that of doxepin for the treatment of depression, nor do we currently intend to evaluate silenortm for the treatment of insomnia in children or adolescents, we cannot assure you that a similar warning statement will not be required.there is no assurance that we will be granted regulatory approval for any of our product candidates. the clinical trials of our product candidates are, and the manufacturing and marketing of our products will be, subject to extensive and rigorous review and regulation by numerous government authorities in the united states and in other countries where we intend to test and market our product candidates. prior to marketing, any product developed by us must undergo an extensive regulatory approval process. we have not requested nor received regulatory approval for any product from the fda or any other regulatory body. this regulatory process, which includes preclinical testing and clinical trials of each compound to establish its safety and efficacy, can take many years and require the expenditure of substantial resources, and may include post-marketing studies and surveillance. data obtained from preclinical testing and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. in addition, delays or rejections may be encountered based upon changes in fda policy for drug approval during theperiod of product development and fda regulatory review of each submitted nda. similar delays may also be encountered in foreign countries. there can be no assurance that regulatory approval will be obtained for any drugs developed by us. a failure to obtain requisite regulatory approvals or to obtain approvals of the scope requested will delay or preclude us from marketing our products or limit the commercial use of the products, and would have a material adverse effect on our business, financial condition and results of operations.even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties. even if u.s. regulatory approval is obtained, the fda may still impose significant restrictions on a products indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. for example, the label ultimately approved for silenortm, if any, may include a restriction on the term of its use, or it may not include one or more of our intended indications the treatment of sleep onset, maintenance and duration. similarly, although doxepin, at higher dosages than we plan to incorporate in silenortm, is not currently and has never been a scheduleiv controlled substance, we cannot be certain that silenortm will be a non-scheduled drug until the fda and the dea complete their review. our product candidates will also be subject to ongoing fda requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. in addition, approved products, manufacturers and manufacturers facilities are subject to continual review and periodic inspections. if a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. if our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may: issue warning letters or untitled letters; impose civil or criminal penalties; suspend regulatory approval; suspend any ongoing clinical trials; refuse to approve pending applications or supplements to approved applications filed by us; impose restrictions on operations, including costly new manufacturing requirements; or seize or detain products or require a product recall.even if our product candidates receive regulatory approval in the united states, we may never receive approval or commercialize our products outside of the united states. in order to market any products outside of the united states, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. approval procedures vary among countries and can involve additional product testing and additional administrative review periods. the time required to obtain approval in other countries might differ from that required to obtain fda approval. the regulatory approval process in other countries may include all of the risks detailed above regarding fda approval in the united states as well as other risks. regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding fda approval in the united states. as described above, such effects include the risks that our product candidates may not be approved for all indications requested, which could limit the uses of our product candidates and have an adverse effect on potential royalties and product sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies. if the manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues. we do not manufacture any of our product candidates, and we do not plan to develop any capacity to do so. patheon pharmaceuticals inc. manufactures clinical supplies of our silenortm and nalmefene product candidates, and we will also contract with a third party to manufacture our acamprosate product candidate. the manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. these problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. our manufacturers may not perform as agreed or may terminate their agreements with us. if our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their contractual obligations, our ability to provide product candidates to patients in our clinical trials would be jeopardized. any delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with maintaining our clinical trial program and, depending upon the period of delay, require us to commence new trials at significant additional expense or terminate the trials completely. we do not have alternate manufacturing plans in place at this time. if we need to change to other commercial manufacturers, the fda and comparable foreign regulators must approve these manufacturers facilities and processes prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for the production of our products. any of these factors could cause us to delay or suspend clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, entail higher costs or result in our being unable to effectively commercialize our products. furthermore, if our manufacturers failed to deliver the required commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues. in addition, all manufacturers of our products must comply with current good manufacturing practice, or cgmp, requirements enforced by the fda through its facilities inspection program. these requirements include quality control, quality assurance and the maintenance of records and documentation. manufacturers of our products may be unable to comply with these cgmp requirements and with other fda, state and foreign regulatory requirements. we have little control over our manufacturers compliance with these regulations and standards. a failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. if the safety of any quantities supplied is compromised due to our manufacturers failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.we rely on third parties to conduct our clinical trials. if these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates. we rely primarily on synteract, inc., a cro, to conduct our clinical trials for our silenortm and nalmefene product candidates, and we may depend on other cros and independent clinical investigators to conduct our future clinical trials. cros and investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. if synteract, other cros or independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it will delay the approval of our fda applications and our introductions of new products. the cros with which we contract for execution of our clinical trials play a significant role in theconduct of the trials and the subsequent collection and analysis of data. failure of the cros to meet their obligations could adversely affect clinical development of our products. moreover, these independent investigators and cros may also have relationships with other commercial entities, some of which may compete with us. if independent investigators and cros assist our competitors at our expense, it could harm our competitive position.materials necessary to manufacture our product candidates may not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our product candidates. we rely on the manufacturers of our product candidates to purchase from third-party suppliers the materials necessary to produce the compounds for our clinical trials and will rely on them for commercial distribution if we obtain marketing approval for any of our product candidates. suppliers may not sell these materials to our manufacturers at the time we need them or on commercially reasonable terms. we do not have any control over the process or timing of the acquisition of these materials by our manufacturers. moreover, we currently do not have any agreements for the commercial production of these materials. if our manufacturers are unable to obtain these materials for our clinical trials, product testing and potential regulatory approval of our product candidates would be delayed, significantly impacting our ability to develop our product candidates. if our manufacturers or we are unable to purchase these materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would materially affect our ability to generate revenues from the sale of our product candidates.if we are unable to establish a sales and marketing infrastructure or enter into collaborations with partners to perform these functions, we will not be able to commercialize our product candidates. we currently do not have significant internal sales, distribution and marketing capabilities. in order to commercialize any of our product candidates, we must either acquire or internally develop sales, marketing and distribution capabilities, or enter into collaborations with partners to perform these services for us. in the united states, we plan to build our own sales force to market our products directly to psychiatrists and neurologists and other targeted physicians. the acquisition or development of a sales and distribution infrastructure for our domestic operations will require substantial resources, which may divert the attention of our management and key personnel and negatively impact our product development efforts. moreover, we may not be able to hire a sales force that is sufficient in size or has adequate expertise. to maximize the value of our product candidates, we will need to enter into collaborations with larger pharmaceutical partners to commercialize our products outside of the psychiatric and neurology specialty markets. we may not be able to enter into collaborations on acceptable terms, if at all. we also face competition in our search for partners with whom we may collaborate. by entering into these strategic collaborations, we may rely on our partners for financial resources and for development, commercialization and regulatory expertise. our partners may fail to develop or effectively commercialize our product candidates because they: do not have sufficient resources or decide not to devote the necessary resources due to internal constraints, such as limited cash or human resources; decide to pursue a competitive potential product that had been developed outside of the collaboration; or cannot obtain the necessary regulatory approvals.we face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization. the use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. if wecannot successfully defend ourselves against these claims, we will incur substantial liabilities. regardless of merit or eventual outcome, liability claims may result in: decreased demand for our product candidates; impairment of our business reputation; withdrawal of clinical trial participants; costs of related litigation; substantial monetary awards to patients or other claimants; loss of revenues; and the inability to commercialize our product candidates. we have obtained limited product liability insurance coverage for our clinical trials with a $5million annual aggregate coverage limit, and our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. we intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. on occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. a successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.if any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited. the commercial success of our product candidates for which we obtain marketing approval from the fda or other regulatory authorities will depend upon the acceptance of these products by the medical community and reimbursement of them by third-party payors, including government payors. the degree of market acceptance of any of our approved products will depend on a number of factors, including: our ability to provide acceptable evidence of safety and efficacy; relative convenience and ease of administration; prevalence and severity of any adverse side effects; limitations or warnings contai 1 < 0.1%
 
risk factors investment in our common stock involves significant risks. before making an investment decision, you should carefully consider the following risk factors in addition to the other information contained in this prospectus. if any of the risks discussed in this prospectus occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. if this were to happen, the price of our common stock could decline significantly, and you could lose all or part of your investment. the risk factors set forth below are not the only risks that may affect us. additional risks and uncertainties not presently known to us, or not identified below, may also materially affect our business, financial condition, liquidity and results of operations. some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. please refer to the section entitled special note regarding forward-looking statements. risks related to our business and our projects our marketsalmost all of our projects are in the greater metropolitan losangeles area and depend upon the southern california economy, which exposes us to more concentrated risk than if our projects were in several geographic regions. almost all of our projects are located in the greater metropolitan losangeles area, and a substantial majority of them are in downtown losangeles or nearby areas, which exposes us to more concentrated economic risks than if we owned projects in several geographic regions. therefore, economic and other events that adversely affect this narrow geographic region will have a direct negative effect on our business and operations. we are susceptible to adverse developments in the southern california region, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, increased telecommuting, terrorist attacks, earthquakes and other natural disasters, infrastructure quality issues, california state budgetary constraints and priorities, increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors. we are also susceptible to adverse developments in the local industrial, commercial and residential real estate market, such as oversupply of or reduced demand for such space. the california economy, in comparison to other parts of the country, is negatively affected to a greater extent by changes and downturns in certain industries, including the entertainment, manufacturing, high technology and defense industries and in pacific rim trading activities. any adverse developments in the economy or real estate market in losangeles or southern california in general would adversely affect us. we cannot assure you of the continued growth of the southern california economy or the national economy or our future growth rate.changing market conditions, especially in the greater metropolitan losangeles area may adversely impact our ability to sell residential units at expected prices, or at all. there will be a significant amount of time before we can develop our residential projects and offer units available for sale. the market value of a unit in a proposed residential project can vary significantly during this time due to changing market conditions. prices of residential units and sales activities in the losangeles market will have a large impact on our profitability because we conduct substantially all of our business in this market. these prices could decline from time to time for market-specific reasons, including adverse economic conditions due to, among other things, the failure or decline of key industries and employers affecting the local, regional or national economies. if market conditions were to reverse, we may need to sell residential units at lower prices than we anticipate, or attempt to convert for-sale units to for-rent units, and may not be able to develop or complete projects as proposed. we may also need to take write-downs of our unit inventories and land holdings if market values decline. recently the losangeles market has begun to exhibit signs of decreasing consumer 22 demand, and sales of new and existing homes declined in september 2006 compared to the same period in 2005. increased rates of price appreciation may reduce the likelihood of consumers seeking to purchase new residences, which would likely harm our ability to sell units in our residential projects. if the prices of residential units or sales activity decline in the key market in which we operate, our costs may not decline at all or at the same rate and, as a result, our business, results of operations and financial condition would be adversely affected.we face competition in the southern california market, which may decrease or prevent increases in the occupancy and rental rates of our projects, and may decrease our profitability from sales of our projects. our projects are located in areas that have other warehouse and industrial, commercial, residential and mixed-use projects, both developed and undeveloped, which may be more attractive to potential tenants or purchasers. competition from other properties may adversely affect our ability to lease or sell our projects and to increase sales prices or the rentals charged on our leases. if our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants, and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants leases expire. we also expect competition in the acquisition of existing properties and the development of new projects. this competition could increase prices for properties of the type that we would like to pursue. as a result, we may not be able, or have the opportunity, to make suitable investments on favorable terms in the future. we will compete in each of our markets with numerous national, regional and local residential builders. this competition with other builders could reduce the scope of our residential projects, or cause us to accept reduced margins in order to maintain sales volume at particular residential projects. our residential projects will also compete with resales of existing used or foreclosed homes and residential units, housing speculators and available rental housing. increased competitive conditions in the residential resale or rental market in the region where we operate could decrease demand for new residential units and increase cancellations of sales contracts in backlog.our future development plans the development and redevelopment of projects are highly speculative activities, and our success depends on our ability to redevelop a majority of our portfolio and develop many new projects, which may make investing in our stock riskier than investing in the stock of real estate companies that own stabilized properties occupied by tenants with long-term leases. as a primary part of our business, we develop new projects and redevelop existing projects. we plan to develop or redevelop a substantial majority of our portfolio. many of our projects are several years away from commencing. all of our projects are subject to national, regional and local economic changes, and localized demographic and population shifts, each of which could affect the demand for the specific types of real estate improvements we anticipate building. in addition, the financial success of each project depends on our ability to plan and execute the project and, in many cases, on our success in securing adequate capital to fund the development or redevelopment. before a project can generate any revenues, material expenditures must be incurred to acquire land, obtain governmental approvals and construct significant portions of project infrastructure and sales facilities. it generally may require several years for a development or redevelopment project, particularly a high-rise residential project, to achieve cumulative positive cash flow. if we are unable to develop and market our projects successfully and to generate positive cash flows from these operations in a timely manner, it will have a material adverse effect on us. 23 more specifically, in connection with the development of new projects and the redevelopment of existing projects, we will be subject to risks such as: cyclical overbuilding; cost overruns, including increases in the cost of materials because of increased global demand (particularly in the price of steel, lumber, drywall, copper and concrete, which are significant components of construction costs); difficulties in obtaining or failures to obtain land use entitlements, occupancy and other government permits and authorizations; delays because of a number of factors, including unforeseen circumstances; changes in political views toward the proposed development, redevelopment or use; governmental restrictions on the nature or size of a project; strikes, labor disputes or supply disruptions, land use entitlements, permitting and other governmental approvals; shortages of qualified trade workers and building materials; development costs for projects not pursued to completion; earthquakes, floods, mudslides, fires, bad weather and other acts of god; design and construction defects and unforeseen or underestimated environmental and engineering problems; contractor and subcontractor disputes and mechanics liens; and lack of income until leasing or sale. any or all of these risks could have an adverse affect on our business, operations, cash flow and ability to increase values for our stockholders. real estate companies that own stabilized, fully developed properties are substantially less affected by many of the specific risks noted above including, but not limited to, failure to obtain land use entitlements, design and development cost overruns, construction delays, and contractor and subcontractor disputes. because these types of real estate companies are less susceptible to these risks, investing in the stock of those companies may be less risky than buying our stock.we may be unable to generate sufficient revenue from operations to pay our operating expenses or execute our business plans. our predecessor business that operated our initial projects had cumulative net losses of approximately $10.0 million and $10.6 million for the year ended december 31, 2005 and the nine months ended september30, 2006, respectively. as of september 30, 2006, we had a negative working capital balance of $147.0 million. in addition, our predecessor business operated at a net profit of only $0.6 million and $0.02 million for the years ended december 31, 2004 and 2003, respectively. following the consummation of this offering and the use of the proceeds therefrom as described in this prospectus, we will have only approximately $30.0 million of unrestricted cash available for working capital purposes on a pro forma basis. thus, our liquidity will be limited and we will be dependent on borrowing funds for any additional capital that we require for operating our 19 24 completed projects, or funding development and redevelopment of our other 34 projects or acquiring those of our projects that will remain subject to acquisition rights immediately following our formation transactions. because of our limited working capital, we cannot assure you that we will be able to develop our portfolio or pay dividends. any continued or future downturns in our operating results and financial performance, unanticipated capital improvements to our completed projects, or substantial increases in project design or redevelopment costs for our other projects, would harm our financial condition.if we cannot obtain additional financing, we will not be able to purchase all of our acquisition projects and our growth will be limited. we expect to use approximately $64.5 million of our net proceeds from this offering to acquire interests in 12 of our projects that are subject to pending purchase and sale contracts we will indirectly assume. however, after we apply the net proceeds from this offering as indicated in this prospectus, we will not have sufficient cash to fund the approximately $120.1 million needed to acquire the interests in five of our projects that will still be subject to purchase rights. as a result, our ability to fund acquisitions, including of such remaining interests, development or other capital expenditures depends on the availability to us of additional debt or equity capital. market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.many of our redevelopment projects require municipal authorities to approve or change land use entitlements, environmental certifications pursuant to the california environmental quality act and other permits to allow these projects to proceed in certain areas so that our projects comply with the land use laws in effect. thirty-four of our projects are proposed for redevelopment. substantially all may require city and other governmental authorities to approve or change land use entitlements, environmental certifications pursuant to the california environmental quality act and other permits to allow our projects to proceed. land use laws are complex and the approval process is subject to delays, the discretion of individual governmental bodies and the political process. there is no guarantee that land use entitlements and other approvals needed for our projects to proceed will ultimately be approved. if we fail to obtain any required land use approvals or entitlements, it would harm our ability to complete certain redevelopment projects.our investment strategy depends on our ability to acquire small, adjacent parcels of land in order to aggregate the land into one larger property for redevelopment. one aspect of our business is to acquire smaller, adjacent real estate parcels over time with a view toward later aggregating those smaller parcels into one large redevelopment project. we cannot assure you that we will be able to carryout this strategy successfully in all cases, or at all. we may be unable to acquire additional parcels adjacent to parcels we already own, or we may overpay for smaller parcels in anticipation of assembling a viable project. acquiring less than all of the land we need for a particular redevelopment project will impair our ability to complete the project as planned. in addition, failure to acquire all the land needed for a particular project may ultimately result in our selling the parcels of land that we do own at a loss.new developments, redevelopments and acquisitions may fail to perform as we expect. we focus our business on the acquisition and redevelopment of industrial, commercial, residential and mixed-use projects. in deciding whether to acquire, develop or redevelop a particular property, we make assumptions regarding the expected future performance of that property. in particular, we estimate the return on our investment based on expected sale or resale value, or occupancy and rental rates, as applicable. if the property is unable to achieve the expected resale price, or occupancy and rental rates, as applicable, depending on our investment strategy for a particular property, it may fail to perform as we expected in analyzing our investment. when we acquire a property, we often reposition or redevelop that property with the goal of 25 increasing profitability. our estimate of the costs of repositioning or redeveloping an acquired property may prove inaccurate. additionally, we may acquire unimproved land properties not leased or not fully leased, and any cash flow from existing operations may be insufficient to pay the operating expenses and debt service associated with that property until the property is improved or more fully leased.our current operations we are subject to high taxes levied on california real estate, and any increases in our property taxes, including through the repeal of laws that establish maximum property tax rates, could adversely affect our business. each of our projects will be subject to real and personal property taxes. these taxes on our projects may increase as tax rates change and as the projects are assessed or reassessed by taxing authorities, and we will experience reassessments as a result of the contribution of our projects to us. in addition, owners of california property are subject to particularly high taxes. if property taxes increase, our business could be adversely affected. moreover, the informational returns that we must file in connection with our formation transactions will cause a reassessment. voters in the state of california previously passed proposition 13, which generally limits annual real estate tax increases to 2% of assessed value per annum. from time to time, various groups have proposed repealing proposition 13, or providing for modifications such as a split roll tax, whereby commercial property, for example, would be taxed at a higher rate than residential property. given the uncertainty, it is not possible to quantify the risk to us of a tax increase or the resulting financial impact of any increase, but any tax increase would reduce the amount of cash available for new investment or distribution to stockholders.we may assume unknown liabilities in connection with the acquisition of properties. we have entered into, been assigned and expect to enter into contracts to acquire real estate that may be subject to existing liabilities, some of which may be unknown at the time we acquire the property. unknown liabilities might include liabilities for cleanup or remediation of environmental conditions, claims of tenants, vendors or other persons dealing with the entities prior to our acquisition of the properties (that had not been asserted or threatened prior to these acquisitions), tax liabilities and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. our recourse with respect to such liabilities will be limited. the assumption of existing liabilities in connection with the acquisition of our properties could have a material adverse affect on our operations and our ability to develop or redevelop such properties.we have sued the sellers of some of the projects for which we have contracts to purchase in order to enforce those contracts, and we cannot assure you that we will succeed in such litigation or that we will not need to bring additional suits against other sellers or that we will succeed in any additional litigation. we are currently involved in two lawsuits against sellers of projects that we have under contract to acquire. we believe the sellers of these projects have breached their obligations under the contracts to sell us the projects according to the terms of the contracts. we either initiated the lawsuits or cross-complained against these sellers to enforce our rights to purchase the particular projects. as the real estate market in southern california remains strong, sellers may continue to breach the terms of contracts with us with the goal of selling the project to another purchaser at a higher price. to date, two projects are affected by these lawsuits which we have under contract to purchase for an aggregate price of approximately $23.7million. while we cannot assure you that we will prevail in any of the lawsuits, we intend to vigorously seek judicial enforcement of our rights to purchase these projects. our failure to prevail in these lawsuits, or any additional lawsuits we may need to bring to enforce other purchase rights, could adversely affect our ability to complete planned projects, which would have an adverse affect on our operations. we may have to seek legal remedies to remove existing tenants from projects that we have planned for redevelopment, which would increase our investment costs, decrease our profitability for those projects and delay completion of the redevelopment. the execution of our business strategy depends on redevelopment and repositioning of some of our existing projects. current tenants of those projects may refuse to vacate the premises to allow the redevelopment work to commence. some tenants may have no legal right to holdover. we take legal action where appropriate to remove holdover tenants so that our projects proceed. any negotiations or legal action with respect to current tenants of redevelopment projects would increase our costs related to the project and delay its completion.we may make errors in determining the creditworthiness of our current or prospective tenants. we expect that substantially all of our leasing revenues will be derived from tenants who do not have publicly available credit ratings and that a substantial majority of our leasing revenues will be derived from tenants with very limited credit histories. for some of these tenants, we expect to analyze the tenants credit by reviewing available financial and other data. we may misinterpret or incorrectly analyze both publicly available credit ratings and internally generated data. these mistakes may, in part, lead us to make investments we would not have otherwise made and may ultimately result in losses on one or more of our investments. any tenant failures to make lease payments when due or tenant bankruptcies could result in the termination of the tenants lease and, particularly in the case of a large tenant, in material losses to us.we depend on tenants, and their failure to pay rent could seriously harm our business, operating results and financial condition. our results of operations and distributable cash flow would be adversely affected if tenants are unable to pay their rent or otherwise meet their obligations to us. in the event of default by tenants, we may experience delays and incur substantial costs in enforcing our rights as landlord. in addition, at any time, a tenant of one of our projects may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenants lease. upon a default, we may not be able to relet the space or to relet the space on terms that are as favorable to us as the defaulted lease. we will be an accrual basis taxpayer and will have to include in income and pay tax on rent that has accrued even though it has not been paid by a tenant. in addition, phantom income tax liability could result for our company to the extent cash profits are reinvested or expended on non-deductible items such as the payment of principal on debt. the inability to depend on tenants, their default and an inability to relet the space on reasonable terms, if at all, would adversely affect our operations and our cash flows.our tenants may conduct activities at our projects that reduce the value of our projects. because we have limited control over the operations and activities of our tenants, they may conduct certain activities that damage the space they lease at one of our projects or cause a project to be viewed in a negative light. our lease documents, our ability to control the actual activities of tenants is limited and, in the event our tenants damage our projects, we may not be able to recoup losses from them, either due to economic or contractual reasons. these activities could reduce the value of the projects in which they lease space, which could reduce the value of our investment, impair our ability to repay debt on the projects or render it more difficult for us to sell the project or re-lease the space to a different tenant, any of which would harm our operations and cash flows.we may be unable to renew leases or find other lessees. we are subject to the risks that, upon expiration, leases may not be renewed, the space subject to such leases may not be relet or the terms of renewal or reletting, including the cost of required renovations, may be less 27 favorable than expiring lease terms. as of september30, 2006, leases representing approximately 25.4% of the square footage of our owned projects are month-to-month leases or will expire by the end of 2006, and an additional approximately 18.7% of the square footage of our owned projects was available for lease. if we were unable to promptly renew a significant number of expiring leases or to promptly relet the space covered by such leases, or if the rental rates upon renewal or reletting were significantly lower than the then current rates, our business may be harmed. additionally, we may incur significant costs to renew expiring leases or lease vacant space. any of these factors could cause a decline in our lease revenues, which could harm our profitability.the leases providing a majority of our portfolios annualized base rents are set to expire before the end of 2007 and we cannot assure you that we will be able to extend these leases or otherwise replace the lost annualized base rent if those leases expire as scheduled. leases constituting a majority of the annualized base rent from our owned projects are scheduled to expire before the end of 2007. as of september 30, 2006, approximately 233 of our leases at our owned projects are on a month-to-month basis. forty-one others are set to expire by the end of 2007. taken together, approximately 66.3% of our owned portfolios annualized base rent, or approximately $15.8 million, may be eliminated through lease expirations by the end of 2007 unless those leases are extended or the space subject to the expiring leases is relet to new tenants. we cannot assure you that we will be able to extend those leases on favorable rent terms, or at all, or locate new tenants who agree to lease favorable lease terms, or at all.in the future, we may offer for-sale residential units and potential customers may be unwilling or unable to purchase our residential units at times when mortgage-financing costs are high. the majority of the potential customers for units in our residential projects that may be for sale in the future will finance their purchases through third-party lenders. in general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing as a result of declining customer credit quality or other issues. during the last two years, residential mortgage rates have risen steadily. if mortgage interest rates continue to increase, the ability or willingness of prospective buyers to finance unit purchases in the future may in turn be adversely affected.our company and management our management has no prior experience operating a public company and therefore may have difficulty in successfully and profitably operating our business. our management operated our predecessor business as a private company and has no experience operating a public company. managing a public company requires compliance with numerous laws and regulations that may not be applicable to a private company. as a result, we cannot assure you that we will be able to operate successfully as a public company or execute our business strategies as a public company. we are developing control systems and procedures to support a public company, which could significantly strain our management systems infrastructure, overhead and other resources. we may initially incur higher general and administrative expenses than our competitors that are managed by persons with experience operating a public company. you will be unable to fully evaluate our managements public company abilities.as a result of this offering, we will be subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared. as a result of this offering, we will become subject to reporting and other obligations under the securities exchange act of 1934, including the requirements of section404 of the sarbanes-oxley act. section404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. these reporting and other obligations will place significant demands on our management, administrative, operational, internal audit and accounting 28 resources and will cause us to incur significant expenses that our predecessor business did not incur as a private company. we will need to upgrade our systems or create new systems; implement additional financial and management controls, reporting systems and procedures; expand our internal audit function; and hire additional accounting, internal audit and finance staff. if we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.we have a near-term expectation of significant growth, and we may not be able to adapt our management and operational systems to respond to this growth, including the development and integration of new projects without unanticipated significant disruption or expense. in order to achieve desired and planned business growth, we intend to expand our development and construction and asset and property management activities significantly. with the expected growth, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to manage our growth without significant operating disruptions or unanticipated costs. as we develop additional projects, we will be subject to risks associated with managing new projects, including project design and construction, tenant retention and mortgage default. by way of example, we are currently subject to an administrative proceeding as a result of demolition activity that occurred at our vignes village project without a permit. as a consequence, the los angeles department of building and safety imposed our 18-month ban on future development at that site. at the time of the demolition, we were involved in three other demolition projects, and our available managerial resources failed to oversee adequately the demolition permitting process for vignes village. in addition, new development and construction may cause disruptions in our operations and divert managements attention away from day-to-day operations, which could impair our relationships with our current tenants and employees.our success depends on key personnel whose continued service is not guaranteed. we depend on the efforts and expertise of our senior executive officers to manage our day-to-day operations and strategic business direction. in addition, many of our senior executive officers have strong industry reputations, which aid us in identifying acquisition and borrowing opportunities, having such opportunities brought to us, and negotiating with tenants and sellers of properties. the loss of the services of these key personnel could diminish our relationships with lenders, existing and prospective tenants, property sellers and industry personnel and harm our business and our prospects.we will enter into an agreement with each of our senior executive officers that will provide him with benefits in the event his employment is terminated by us without cause or by him for good reason, which benefits could conflict with the best interest of our stockholders. we will enter into an agreement with each of our senior executive officers that will provide him with severance benefits if his employment is terminated by us without cause or by him for good reason. certain of these benefits, including a related tax indemnity in favor of two of our executives, could prevent or deter a change in control of our company that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.all management rights are vested in our board of directors, and our stockholders have limited rights. our board of directors is responsible for our management and strategic business direction, and our senior executive officers are responsible for our day-to-day operations. our major policies, includin 1 < 0.1%
 
risk factors you should carefully consider the following risks and all the information set forth in this prospectus before investing in our common stock. risks relating to our company the majority of our revenues and net income directly correlates to the dollar amount of fuel purchased by our customers, and, as a result, volatility in fuel prices could have an adverse effect on our results of operations. in 2004, approximately 64% of our total revenues was attributable to fees paid to us by fuel and vehicle maintenance providers based on a negotiated percentage of the purchase price paid by our customers. our customers primarily purchase fuel. accordingly, our revenues and profitability are largely dependent on fuel prices, which are prone to significant volatility. for example, we estimate that during 2004, a ten cent decline in average fuel prices below average actual prices would have resulted in approximately a $6.0 million decline in 2004 revenue and a $3.2 million decline in 2004 net income. although we have benefited from historically high fuel prices during 2003 and 2004, a significant decline in the price of fuel in future periods could have a material adverse effect on our results of operations. fuel prices are dependent on several factors, all of which are beyond our control. these factors include, among others: supply and demand for oil and gas, and expectations regarding supply and demand; actions by the organization of petroleum exporting countries (opec), russia, mexico or other major oil producing nations; political conditions in other oil-producing and gas-producing countries, including insurgency, terrorism or war; refinery capacity; weather; the prices of foreign exports and the availability of alternate fuel sources; general worldwide economic conditions; and governmental regulations and tariffs.derivatives transactions may not adequately protect us from an extended decline in gasoline prices and may cause volatility in our net income. because the majority of our revenues and net income correlate directly to fuel prices, which are prone to significant volatility, in january 2005 we entered into contracts to economically hedge our exposure to the volatility of future fuel prices. these transactions may expose us to the risk of financial loss if for example the counterparties fail to perform under the contracts governing those arrangements, we unwind our position before the expiration of the contract or there is a sudden material change in fuel prices. the success of our derivatives strategy depends upon, among other things, our ability to forecast the amount of fuel purchases by fleets using our services. to the extent our forecasts are inaccurate these derivative contracts may be inadequate 13 to protect us against significant changes in fuel prices or over-expose us to fuel price volatility. unrealized gains and losses on these contracts will be recorded each quarter to reflect changes in the market value of the underlying contracts. as a result, our quarterly net income may be prone to significant volatility.our industry has become increasingly competitive, which makes it more difficult for us to maintain profit margins at historical levels. we face increased levels of competition in each category of the overall industry from several companies that seek to offer competing capabilities and services. historically, we have primarily been able to provide customers with a unique spectrum of services and capabilities and, therefore, we have not considered price to be the exclusive or even the primary basis on which we compete. as our competitors have continued to develop their service offerings, it has become increasingly more difficult for us to compete solely on the basis of superior capabilities or service. in some areas of our business, we have been forced to respond to competitive pressures by reducing our fees. for example, over the past few years we have experienced a steady decline in account servicing revenue as a percentage of total revenues. account servicing revenue is the revenue we earn from establishing and maintaining customer accounts. we have also experienced a small decline in the percentage of the dollar amount that we retain from transactions we process, which percentage we negotiate with fuel and vehicle maintenance providers. if these trends continue and if competition intensifies, our profitability may be adversely impacted. while we have traditionally offered our services to all categories of the fleet industry, with particular emphasis on mid-sized and large commercial fleets, some of our competitors have successfully garnered significant share in particular categories of the overall industry. for example, we believe u.s. bank voyager fleet systems, inc. has the largest share among the government fleet category of the industry and comdata corporation has a significant share of the heavy truck category. to the extent that our competitors are regarded as leaders in specific categories, they may have an advantage over us as we attempt to further penetrate these categories. we also face increased competition from our competitors servicing the fleet industry in our efforts to forge relationships with companies that can afford us access to their fleet customers. this heightened level of competition makes it more difficult for us to enter into new relationships and renew existing relationships on the same terms.we may face competition from large financial institutions which have not traditionally focused on our business. large financial institutions have not traditionally focused on providing fleets with products and services similar to ours, but they may do so in the future. potential competitors, such as financial institutions that can issue visa and mastercard products and american express credit and charge cards, may have substantially greater financial resources and brand name recognition than we have. although these companies offer products and services with similar features to ours, they do not currently offer fleets the level of information management, security and purchasing control that we provide through our proprietary closed network. these companies may either develop applications that allow them to offer products with similar features to ours or enter into strategic alliances or other relationships. large financial institutions may have pre-existing financial and 14 other business relationships with companies with which we have strategic relationships. these companies could potentially bundle fleet services similar to those that we offer with a larger array of financial services. if these companies were to focus on providing these services to fleets, we could face significant competition and our ability to maintain and attract customers could be diminished.major oil companies may provide service offerings targeted toward their fleet customers, which may compete with our services. major oil companies have not traditionally provided universally-accepted transaction processing and information management services specifically tailored to their fleet customers. rather, oil companies have entered into strategic relationships with us and other companies to provide these services, typically for a fee equal to a small percentage of the dollar amount of purchases or a fixed fee made by the small fleet customer at the oil companys locations. to the extent major oil companies were to develop and promote universally-accepted fleet transaction services similar to ours, they could potentially offer fleets using their transaction services better fuel pricing at their locations than would be available to our customers, which would diminish the attractiveness of our offerings.our business and results of operations are dependent on several key strategic relationships, the loss of which could adversely affect our combined results of operations. revenue we received from services we provided to our top five strategic relationships accounted for approximately 23% of our revenues in 2004. included in our top five strategic relationships are two of the largest north american oil companies and three of the largest domestic fleet management companies. for our co-branded and private label relationships, the ultimate fleet customer maintains a primary relationship with the fleet management company, automobile manufacturer or fuel retailer with which we have contracted to provide our services. these fleets are often unaware of our role in providing services to them, and we are not in primary control of the relationship with the fleet customer. accordingly, we are highly dependent on maintaining our strategic relationships and our business and results of operations may be prone to greater volatility and uncertainty than would be the case if we had direct relationships with all of the fleets for which we provided services. likewise, we also have agreements with the major oil companies and fuel retailers whose locations accept our payment processing services. through these agreements, we are able to include their locations in our proprietary closed network. if the termination of any of these agreements reduces the number of locations where our payment processing services are accepted, we could lose our competitive advantage and our business and results of operations could be adversely affected.decreased demand for fuel and other vehicle products and services could harm our business and results of operations. our results of operations are dependent on the number of transactions we process and the dollar value of those transactions. we believe that our transaction volume is correlated with general economic conditions in the united states. a downturn in the united states economy is generally characterized by reduced commercial activity and, consequently, reduced purchasing of fuel and other vehicle products and services. 15 in addition, demand for fuel and other vehicle products and services may be reduced by other factors that are beyond our control, such as the development by vehicle manufacturers and adoption by our fleet customers of vehicles with greater fuel efficiency or alternative non-liquified fuel sources.our ability to remain competitive depends on our rapid implementation of new technology and systems, and our failure to effectively implement new technology could jeopardize our position as a leader in our industry. as a provider of information management and payment processing services, we must constantly adapt and respond to the technological advances offered by our competitors and the informational requirements of our customers, including those related to the internet, in order to maintain and improve upon our competitive position. we may not be able to expand our technological capabilities and service offerings as rapidly as our competitors, which could jeopardize our position as a leader in our industry. in march 2005, we intend to transition a large strategic relationship to our new technology platform and we expect to continue to transition our customers and strategic relationships to our new technology platform over time. as we commence widespread implementation of our new technology platform, there is a risk that programming errors, hardware constraints or other problems may occur. such problems could result in service outages or delays, corruption or loss of important data and/or customer dissatisfaction. we may not be able to implement our new operating systems without encountering problems that could harm our business.we are dependent on technology systems and electronic communications networks managed by third parties which could result in our inability to prevent service disruptions. our ability to process and authorize transactions electronically depends on our ability to electronically communicate with our fuel and vehicle maintenance providers through point-of-sale devices and electronic networks that are owned and operated by third parties. the electronic communications networks upon which we depend are often subject to disruptions of various magnitudes and durations. any severe disruption of one or all of these networks could impair our ability to authorize transactions or collect information about such transactions, which, in turn, could harm our reputation for dependable service and adversely affect our results of operations. in addition, our ability to collect enhanced data relating to our customers purchases may be limited by the use of older point-of-sale devices by fuel and vehicle maintenance providers. to the extent that fuel and vehicle maintenance providers within our network are slow to adopt advanced point-of-sale devices, we may not be able to offer the services and capabilities our customers demand.if we fail to adequately assess and monitor credit risks of our customers, we could experience a significant increase in bad debt expense. we are subject to the credit risk of a majority of our customers, many of which are small to mid-sized businesses. we use various formulae and models to screen potential customers and establish appropriate credit limits, but these formulae and models cannot eliminate all potential bad credit risks and may not prevent us from approving applications that are fraudulently completed. increases in average fuel prices can require us to periodically increase credit limits for a significant number of our customers. moreover, businesses that are good credit risks at the time of application may become bad credit risks over time and we may fail to detect such change. in 16 times of economic recession, the number of our customers who default on payments owed to us tends to increase. if we fail to adequately manage our credit risks, our bad debt expense could be significantly higher than it has been in the past.the loss or suspension of our charter for our utah industrial bank would be disruptive to our operations and increase costs. our bank regulatory status enables us to issue certificates of deposit, accept money market deposits and borrow federal funds. in 2004, average deposits and borrowings by our bank subsidiary were approximately $183.2 million. these funds were used to support our payment processing operations, which require us to make payments to fuel and maintenance providers on behalf of fleets. our bank subsidiary also enables us to operate under a uniform set of state lending laws. our bank operations are subject to extensive state and federal regulation. we are currently licensed on the state level by the utah department of financial institutions and at the federal level by the federal deposit insurance corporation. continued licensing and federal deposit insurance are subject to ongoing satisfaction of compliance and safety and soundness requirements. for example, our bank must be well capitalized and satisfy a range of additional capital requirements. if we were to lose our bank charter, we would either outsource our credit support activities or perform these activities through our corporate parent company which would subject us to the credit laws of each individual state in which we conduct business. any such change would be disruptive to our business and could result in significant incremental costs. moreover, our banks ability to pay dividends is subject to regulatory constraints, which may affect our ability to pay dividends to our stockholders. in addition, changes in the bank regulatory environment, including the implementation of new or varying measures or interpretations by the state of utah or the u.s. federal government, may significantly affect or restrict the manner in which we conduct our business in the future.we may not be able to adequately protect the data we collect about our customers, which could subject us to liability and damage our reputation. we collect and store data about our customers and their fleets, including bank account information and spending data. our customers expect us to keep this information in our confidence. we may experience attempts by experienced programmers or hackers to penetrate our network security. a party who is able to penetrate our network security could misappropriate our proprietary information or cause interruptions in our wexonline web site. we may be required to expend significant capital and other resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches. moreover, any security breach or inadvertent transmission of information about our customers could expose us to liability and/or litigation and cause damage to our reputation. in addition, when we fund customer transactions, we typically assume the risk of losses due to unauthorized or fraudulent use of our charge cards, which could be substantial. we do not maintain any insurance to protect us against any such losses.since we will have approximately $270.0 million of variable-rate indebtedness under our new credit agreement and we finance customer transactions with deposits and borrowed federal funds, rising interest rates would reduce our net income. we will have approximately $270.0 million of indebtedness outstanding following this offering under our new credit agreement that will bear interest at rates that vary with changes in overall 17 market interest rates for instruments of similar term. market interest rates, which were at historical low levels in 2003 and 2004, have been rising steadily over the past several months. for every 1.0%, or 100 basis point, increase in market interest rates following this offering, we would incur approximately $2.7 million per year in incremental financing interest expense under our new credit agreement. we would also face increased borrowing costs to fund our payment processing operations during periods of higher interest rates. during 2004, we had an average accounts receivable balance in respect of these funding activities of $418.9 million. we generally support our funding activities through the issuance of certificates of deposit, escrow deposits in the form ofmoney market deposits, customer deposits and borrowed federal funds through our bank subsidiary, in each case, with maturities of less than six months. accordingly, our borrowing costs fluctuate in proportion to short term-interest rates prevailing in the market. our operating interest expense was $5.6million in 2004. however, for every 1.0%, or 100 basis point, increase in average market interest rates, we would have incurred approximately $1.8 million in incremental operating interest expense in 2004. to the extent we do not to hedge or otherwise mitigate our exposure to rising interest rates in the future, our income before income taxes will be reduced by the amount of incremental interest expense.we depend on key management and if we are unable to retain those employees, we could lose valuable strategic and customer relationships. we believe that our future depends, in part, on the continued services of our senior management team, including michael dubyak, our president and chief executive officer, who has been with wright express since 1986. losing the services of mr. dubyak or other members of our senior management team could adversely affect our strategic and customer relationships and impede our ability to execute our growth strategies. we do not currently maintain key person life insurance policies with respect to our executive officers.we intend to enter into a credit agreement that may restrict our operating flexibility. concurrently with the closing of this offering, we intend to enter into a new credit agreement that will consist of a $220.0 million term loan and a revolving credit facility that will provide for borrowings of up to $130.0 million. the credit agreement will contain restrictions on our and our subsidiaries ability to, among other things: pay dividends to our stockholders; sell or transfer all or substantially all of our property or assets; incur more indebtedness or make guarantees; grant or incur liens on our assets; make investments, loans, advances or acquisitions; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with our affiliates; enter into sales or leasebacks; and change our accounting policies or reporting practices. 18 the restrictions contained in the credit agreement could hurt our ability to finance our future operations or capital needs or make acquisitions that may be in our best interest. in addition, our credit agreement will require that we comply with several financial maintenance covenants. specifically, we expect that our new credit agreement will contain financial covenants requiring us to maintain a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio at the end of each fiscal quarter. the credit agreement will require us to maintain a maximum consolidated leverage ratio of 3.50 to 1.00 at the end of each fiscal quarter until september 30, 2005, 3.00 to 1.00 at the end of each fiscal quarter until september 30, 2006, 2.50 to 1.00 at the end of each fiscal quarter until september 30, 2007, 2.00 to 1.00 at the end of each fiscal quarter until september30, 2008 and 1.50 to 1.00 at the end of each fiscal quarter until the maturity date. the credit agreement will also require us to maintain a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 at the end of each fiscal quarter until december 31, 2006 and 1.50 to 1.00 at the end of each fiscal quarter until the maturity date. our ability to comply with these financial requirements and other restrictions may be affected by events beyond our control, and our inability to comply with them could result in a default under our credit agreement. if a default occurs under our credit agreement, the lenders under the revolving credit facility or term loan could elect to declare all of the outstanding borrowings, as well as accrued interest and fees, to be due and payable and require us to apply all of our available cash to repay those borrowings. in addition, a default may result in higher rates of interest and the inability to obtain additional capital.we have benefited from being a subsidiary of much larger entities and we may not be able to maintain our historical growth rate as an independent company. cendant has been our parent company since march 2001. from june 1999 to march 2001, avis group holdings, inc., or avis, was our parent company. from december 1997 to june 1999, we were a wholly owned subsidiary of cendant and, from february 1996 to december 1997, we were a wholly owned subsidiary of an entity that subsequently merged with hfs incorporated to form cendant. accordingly, all of our recent growth has occurred while we were a subsidiary of much larger entities. in the past, our ability to establish important business relationships has been facilitated by our affiliation with these respective parent companies. our co-branded strategic relationship with phh vehicle management services, llc was established while we and it were subsidiaries of avis. in addition, as a subsidiary of cendant, we entered into agreements with jackson hewitt tax service inc., formerly a subsidiary of cendant, and cendant travel distribution services, inc. to provide mastercard products. these business relationships have contributed to our historical growth. as an independent company, we may not be able to sustain the same level of growth in our business as we have experienced as a subsidiary of cendant or avis. see certain relationships and related-party transactions.we will rely on cendant to provide transitional services to us and may not be able to replace those services at the same cost. simultaneously with the closing of this offering, we will enter into an agreement that will require cendant to provide transitional services to us. the terms of the services to be provided under the transitional agreement vary depending on the specific service to be provided, with the majority of the terms expiring by december 31, 2005. we may be unable to sustain these services at the same level as when we were controlled by cendant. after the expiration of this agreement, we may not be able to replace these services in a timely manner or on terms and 19 conditions, including cost, as those we have historically received from cendant. this agreement will be entered into in the context of a parent-subsidiary relationship and will be negotiated in the context of this offering. accordingly, this agreement may not reflect terms that would have resulted from arms-length negotiations with unaffiliated third parties. after this offering, we intend to transition such services to similar services to be provided by our internal resources, as well as to contract with unaffiliated third party providers for which we expect to incur higher costs.we may incur significant liability to cendant pursuant to the indemnification provisions of the transitional agreement. the transitional agreement will provide that we will indemnify cendant and its affiliates against potential losses based on, arising out of or resulting from: any breach by us of the transitional agreement with cendant; claims by third parties relating to the ownership or the operation of our assets or properties and the operation or conduct of our business, whether in the past or future, including any litigation pending against cendant at the time of closing, if any, with respect thereto; any other activities we engage in; tax sharing arrangements; any third party claims relating to other acts or omissions arising out of performance of the transitional agreement, the sublease or the sublease assignment and assumption agreement whether in the past or future; any guaranty, keepwell, net worth or financial condition maintenance agreement of or by cendant provided to any parties with respect to any of our or our subsidiaries actual or contingent obligations; liabilities under the securities act of 1933 related to this offering; and other matters described in the transitional agreement.we will be required to pay cendant for most of the tax benefits we receive in connection with this offering and related transactions. we expect that, as a result of this offering and related transactions, the tax basis of our tangible and intangible assets will be increased to reflect their fair market value. for this purpose, we believe that the fair market value of our assets will be based in part upon the initial publicoffering price of our common stock. we further expect that this increase in tax basis will reduce the amount of united states federal income tax that we might otherwise be required to pay in the future. in this regard, we intend to enter into a tax receivable agreement with cendant that will require us to pay cendant 85% of any tax savings that we realize. under the tax receivable agreement, tax savings that we realize will equal the difference between (i) the income taxes that we would pay if the tax basis of our assets was as currently shown on our books and (ii) the income taxes that we actually pay taking into account depreciation and 20 amortization deductions attributable to the fair market value basis in our assets. we expect to make these payments to cendant on a quarterly basis over the period in which tax savings are realized, which could exceed 20 years. while the actual amount and timing of payments under the tax receivable agreement will vary depending upon a number of factors, including the fair market value of our assets, whether we generate net operating losses for tax purposes, and our effective tax rate during the amortization period, we expect that, as a result of the size of the increase in the tax basis of our tangible and intangible assets, the payments that may be made to cendant could be substantial. based on the initial offering price for our common stock and assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, we anticipate that future payments to cendant will be approximately $450.8 million in the aggregate over the expected term of the tax receivable agreement.actions taken by us prior to the completion of this offering are intended to be in the best interest of cendant and such actions may conflict with your interests. prior to the completion of this offering, we have operated as a wholly owned subsidiary of cendant. the purpose of this offering, the borrowings under our new credit agreement, the tax receivable agreement and the payment of the special dividend to cendant, each as described in this prospectus, is to benefit cendant in connection with its disposition of its entire ownership interest in us. this purpose is not aligned with the interests of our stockholders following this offering, and in evaluating the transactions and agreements with cendant that are described in this prospectus, you should be aware that actions taken by us prior to the completion of this offering are intended to be in the best interest of cendant and such actions may conflict with your interests. specifically, prior to the completion of this offering, we will declare a special dividend to cendant of $305.9 million (consisting of approximately $280.8 million of cash and the cancellation of the entire balance of the net receivable from cendant of $25.1million). we intend to borrow $270.0 million under our new credit agreement and use excess cash on hand in order to fund the cash portion of the special dividend. risks related to our common stockthere may be a limited public market for our common stock, and our stock price may experience volatility. an active trading market for our common stock may not develop as a result of this offering or be sustained in the future. in addition, the stock market has from time to time experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of particular companies. changes in earnings estimates by analysts and economic and other external factors may have a significant impact on the market price of our common stock. fluctuations or decreases in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and our ability to raise capital through future equity financing.if any entity controls 5% or more of our common stock and such entity has caused a violation of applicable banking laws by its failure to obtain any required approvals prior to acquiring such common stock, we will have the power to restrict such entitys ability to vote such shares. as owners of a utah industrial bank, we are subject to banking regulations that require any entity that controls 5% or more of our common stock to obtain the prior approval of utah 21 banking authorities, and any person or entity who controls 10% or more of our common stock must obtain the prior approval of federal banking regulators. a failure to comply with these requirements could result in sanctions, including the loss of our utah industrial bank charter. our certificate of incorporation will require that if any stockholder fails to provide us with satisfactory evidence that any required approvals have been obtained, we may, or will if required by state or federal regulators, restrict such stockholders ability to vote such shares with respect to any matter subject to a vote of our stockholders.provisions in our charter documents, delaware law and applicable banking law may delay or prevent our acquisition by a third party. our certificate of incorporation, by-laws and our rights plan will contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. these provisions include, among other things, a classified board of directors, the elimination of stockholder action by written consent, advance notice for raising business or making nominations at meetings of stockholders and blank check preferred stock. blank check preferred stock enables our board of directors, without stockholder approval, to designate and issue additional series of preferred stock with such special dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no limitations on conversion, as our board of directors may determine, including rights to dividends and proceeds in a liquidation that are senior to the common stock. these provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting common stock. we are also 1 < 0.1%
 
risk factors investing in our common stock involves a high degree of risk. the risks described below are not the only ones facing us. additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. if any of the following risks actually occur, our business, operating results or financial condition could be materially harmed. in such cases, the trading price of our common stock could decline and you may lose all or part of your investment. before investing in our common stock, you should carefully consider each of the following risk factors and all of the other information set forth in this prospectus, including the financial statements and the notes thereto. risks related to our business and industrywe have limited experience in targeting a global marketplace and compete in a rapidly evolving industry which makes our future operating results difficult to predict. we have limited experience in targeting the global business intelligence marketplace. in addition, we have a limited operating history in an industry characterized by rapid technological innovation, changing customer needs, evolving industry standards and frequent introductions of new products, enhancements and services. any of these factors can render our existing software platform and services obsolete or unmarketable. we believe that our future success will depend in large part on our ability: to support current and future releases of popular hardware, operating systems, computer programming languages, databases and software applications to develop new products that achieve market acceptance in a timely manner to meet an expanding range of customer requirements as we encounter increasing competitive pressures, we will likely be required to modify, enhance, reposition or introduce new products and service offerings. we may not be successful in doing so in a timely, cost-effective and appropriately responsive manner, or at all. all of these factors make it difficult to predict our future operating results which may impair our ability to manage our business and your ability to assess our prospects.we may experience quarterly fluctuations in our operating results due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance. our operating results may fluctuate due to a variety of factors, many of which are outside of our control. as a result, comparing our operating results on a period-to-period basis may not be meaningful. you should not rely on our past results as an indication of our future performance. if our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock could decline substantially. our operating results have varied in the past. in addition to other risk factors listed in this risk factors section, factors that may affect our quarterly operating results, business and financial condition include the following: demand for our software platform and services and the size and timing of orders market acceptance of our current and future products a slowdown in spending on information technology and software by our current and/or prospective customers sales cycles and performance of our indirect channel partners and original equipment manufacturers (known as oems) budgeting cycles of our customers the management, performance and expansion of our international operations the rate of renewals of our maintenance agreements changes in the competitive dynamics of our markets our ability to control costs, including our operating expenses 10 customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors the outcome or publicity surrounding any pending or threatened lawsuits the timing of recognizing revenue in any given quarter as a result of revenue recognition rules an increase in the rate of product returns foreign currency exchange rate fluctuations failure to successfully manage any acquisitions general economic and political conditions in our domestic and international markets in addition, we may in the future experience fluctuations in our gross and operating margins due to changes in the mix of our direct and indirect sales, domestic and international revenues, and license and service revenues. we may implement changes to our license pricing structure for all of our products including increased prices and modified licensing parameters. if these changes are not accepted by our current or future customers, our business, operating results and financial condition could be harmed. based upon all of the factors described above, we have a limited ability to forecast the amount and mix of future revenues and expenses, and it is likely that at some time our operating results will fall below our estimates or the expectations of public market analysts and investors.we depend on revenue from a single product platform. we are dependent on a single product platform, qlikview. our business would be harmed by a decline in demand for, or in the price of, our software platform as a result of, among other factors: any change in our pricing model increased competition support, research and development or other expenditures undertaken in attempts, whether or not successful, to develop new products a maturation in the markets for our productsour financial results would suffer if the market for business intelligence software does not continue to grow or if we are unable to further penetrate this market. nearly all of our revenues to date have come from sales of business intelligence software and related maintenance services. we expect these sales to account for substantially all of our revenues for the foreseeable future. although demand for business intelligence software has grown in recent years, the market for business intelligence software applications is still evolving. we cannot be sure that this market will continue to grow or, even if it does grow, that customers will purchase our software platform or services. we have spent, and intend to keep spending, considerable resources to educate potential customers about business intelligence software in general and our software platform in particular. however, we cannot be sure that these expenditures will help our software platform achieve any additional market acceptance or enable us to attract new customers or new users at existing customers. a reduction in the demand for our services and software platform could be caused by, among other things, lack of customer acceptance, weakening economic conditions, competing technologies and services or decreases in software spending. if the market and our market share fail to grow or grow more slowly than we currently expect, our business, operating results and financial condition would be harmed.we use indirect channel partners and if we are unable to maintain successful relationships with them, our business, operating results and financial condition could be harmed. in addition to our direct sales force, we use strategic indirect channel partners such as distribution partners, value-added resellers, system integrators and oems to license and support our software platform. for the three months ended march31, 2010, transactions by indirect channel partners accounted for approximately 50% of our total product licenses revenues and first years maintenance billings. 11 our channel partners may offer customers the products of several different companies, including products that compete with ours. our channel partners generally do not have an exclusive relationship with us; thus, we cannot be certain that they will prioritize or provide adequate resources for selling our products. divergence in strategy or contract defaults by any of these channel partners may harm our ability to develop, market, sell or support our software platform. in addition, establishing and retaining qualified indirect sales channel partners and training them in our software platform and services require significant time and resources. in order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in systems and training. these processes and procedures may become increasingly complex and difficult to manage as we grow our organization. our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our channel partners. there can be no assurance that our channel partners will continue to cooperate with us when our distribution agreements expire or are up for renewal. if we are unable to maintain our relationships with these channel partners, our business, operating results and financial condition could be harmed. in addition, there can be no assurance that actions taken or not taken by such parties will not harm us. also, in a number of regions we rely on a limited number of resellers, and our business may be harmed if any of these resellers were to fail to effectively address their specified geographic territories. in addition, we rely on our channel partners to operate in accordance with the terms of their contractual agreements with us. for example, our agreements with our channel partners limit the terms and conditions pursuant to which they are authorized to resell or distribute our software and offer technical support and related services. we also typically require our channel partners to provide us with the dates and details of product license transactions sold to end user customers. if our channel partners do not comply with their contractual obligations to us, our business, results of operations and financial condition may be harmed.if we are unable to expand our direct sales capabilities, we may not be able to generate increased revenues. in order to succeed, we must expand our direct sales force to generate increased revenue from new customers. as of march31, 2010, we had a team of 127 dedicated direct sales professionals, and we intend to increase our number of direct sales professionals. new hires will require training and will take time to achieve full productivity. we cannot be certain that new hires will become as productive as necessary or that we will be able to hire enough qualified individuals in the future. failure to hire qualified direct sales personnel will preclude us from expanding our business and growing our revenue.as we pursue new enterprise customers, additional oem opportunities or more complicated deployments, our sales cycle and deployment processes may become more unpredictable and require greater time and expense. we anticipate that our sales cycle may lengthen as we pursue new enterprise customers. enterprise customers may undertake a significant evaluation process in regard to enterprise software which can last from several months to a year or longer. if our sales cycle were to lengthen in this manner, events may occur during this period that affect the size or timing of a purchase or even cause cancellations, and this may lead to more unpredictability in our business and operating results. additionally, sales cycles for sales of our software platform to oems tend to be longer, ranging from three to 12months or more, and may involve convincing a partners entire organization that our software platform is the appropriate software for its applications. we may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. in addition, we may face unexpected deployment challenges with enterprise customers or more complicated installations of our software platform. it may be difficult to deploy our software platform if the customer has unexpected database, hardware or software technology issues. additional deployment complexities may occur if a customer hires a third party to deploy our software platform or if one of our indirect channel partners leads the implementation of our solution. any difficulties or delays in the initial implementation could cause customers to reject our software or lead to the delay or non-receipt of future orders, in which case our business, operating results and financial condition would be harmed. managing our international operations is complex and our failure to do so successfully could harm our business, operating results and financial condition. we receive a significant portion of our total revenues from international sales from foreign direct and indirect operations. international revenues accounted for approximately 77% of our total revenues for each of the years ended december31, 2007, 2008 and 2009, and 73% and 75% for the three months ended march31, 2009 and 2010. we have facilities located in australia, austria, belgium, denmark, finland, france, germany, india, italy, japan, the netherlands, portugal, singapore, spain, sweden, switzerland and the united kingdom. we expect to continue to add personnel in additional countries. our international operations require significant management attention and financial resources. there are certain risks inherent in our international business activities including, but not limited to: managing and staffing international offices and the increased costs associated with multiple international locations maintaining relationships with indirect channel partners outside the united states, whose sales and lead generation activities are very important to our international operations multiple legal systems and unexpected changes in legal requirements tariffs, export restrictions, trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets trade laws and business practices favoring local competition costs of localizing products and potential lack of acceptance of localized versions potential tax issues, including restrictions on repatriating earnings and multiple and conflicting tax laws and regulations weaker intellectual property protection in some countries difficulties in enforcing contracts and collecting accounts receivable, longer sales cycles and longer payment cycles, especially in emerging markets the significant presence of some of our competitors in certain international markets our ability to adapt to sales practices and customer requirements in different cultures political and economic instability, including war and terrorism or the threat of war and terrorism we believe that, over time, a significant portion of our revenues and costs will continue to be denominated in foreign currencies. to the extent such denomination in foreign currencies does occur, gains and losses on the conversion to united states dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. although we may in the future decide to undertake foreign exchange hedging transactions to cover a portion of our foreign currency transaction exposure, we currently do not hedge any foreign currency exposure. if we are not effective in any future foreign exchange hedging transactions in which we engage, our business, operating results and financial condition could be harmed. in addition, compliance with foreign and united states laws and regulations that are applicable to our international operations is complex and may increase our cost of doing business in international jurisdictions, and our international operations could expose us to fines and penalties if we fail to comply with these regulations. these laws and regulations include import and export requirements, united states laws such as the foreign corrupt practices act, and local laws prohibiting corrupt payments to governmental officials. although we have implemented policies and procedures designed to help ensure compliance with these laws, there can be no assurance that our employees, partners and other persons with whom we do business will not take actions in violation of our policies or these laws. any violations of these laws could subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to offer our products and services to one or more countries, and could also materially damage our reputation, our brand and our international expansion efforts. our failure to manage any of these risks successfully could harm our international operations and reduce our international sales. if new industry standards emerge or if we are unable to respond to rapid technological changes, demand for our software platform may be adversely affected. we believe that our future success will depend in large part on our ability: to support current and future industry standards, including databases and operating systems to maintain technological competiveness and meet an expanding range of customer requirements to introduce new products and features for our customers the emergence of new industry standards in related fields may adversely affect the demand for our existing software platform. this could happen, for example, if new technologies emerged that were incompatible with customer deployments of our software platform. we currently support open database connectivity, or odbc, and object linking and embedding database, or oledb, standards in database access technology. if we are unable to adapt our software platform on a timely basis to new standards in database access technology, the ability of our software platform to access customer databases could be impaired. in addition, the emergence of new server operating systems standards could adversely affect the demand for our existing software platform. our platform currently requires the windows server operating system when deployed on a server, as used in most multi-user deployments. if customers are unwilling to use windows server, we may not be able to achieve compatibility on a timely basis or without substantial research and development and support expense. we currently support all generally available client operating systems that run industry standard web browsers, but we cannot assure you that we will be able to support future client operating systems and web browsers in a timely and cost-effective manner, if at all. the markets for our software platform and services are also characterized by rapid technological and customer requirement changes. in particular, our technology is optimized for servers utilizing the x86 and x64 families of microprocessors. if the speed and performance of these microprocessor families do not continue to increase at the rates we anticipate, our software may not attain the performance speed and capabilities that we expect. also if a different microprocessor architecture were to gain widespread acceptance in server applications, we may not be able to achieve compatibility on a timely basis or without substantial research and development and support expense. difficulty by us in achieving compatibility with a different microprocessor architecture or other technological change or in satisfying changing customer requirements could render our existing and future products obsolete and unmarketable. as a result, we may not be able to accurately predict the lifecycle of our software platform and services, and they may become obsolete before we receive the amount of revenues that we anticipate from them. business intelligence software is inherently complex. the development and testing of new products and product enhancements can require significant research and development expenditures. as a result, substantial delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could harm our business, operating results and financial condition. we may not successfully develop and market product enhancements or new products that respond to technological change or new customer requirements. even if we introduce a new product, we may experience a decline in revenues of our existing products that is not fully matched by the new products revenue. for example, customers may delay making purchases of a new product to make a more thorough evaluation of the product, or until industry and marketplace reviews become widely available. in addition, we may lose existing customers who choose a competitors product rather than migrate to our new product. this could result in a temporary or permanent revenue shortfall and harm our business.our business depends on customers renewing their annual maintenance contracts and our ability to collect renewal fees. any decline in maintenance renewals could harm our future operating results. we sell our software platform pursuant to a perpetual license with a fixed upfront fee which ordinarily includes one year of maintenance as part of the initial price. our customers have no obligation to renew their maintenance agreements after the expiration of this initial period, and they may not renew these agreements. we may be unable to predict future customer renewal rates accurately. our customers renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our software platform, the prices of our software platform, the prices of products and services offered by our competitors or reductions in our customers spending levels. if our customers do not renew their maintenance and support arrangements or if they renew them on less favorable terms, our revenue may decline 14 and our business will suffer. a substantial portion of our quarterly maintenance revenue is attributable to maintenance and support agreements entered into during previous quarters. as a result, if there is a decline in renewed maintenance agreements in any one quarter, only a small portion of the decline will be reflected in our maintenance revenue recognized in that quarter and the rest will be reflected in our maintenance revenue recognized in the following four quarters or more. in addition, we may have difficulties collecting renewal fees from our customers, especially in regards to customers located in emerging international markets. if we are unable to collect renewal fees from customers, our business will be harmed.our software platform could contain undetected errors, or bugs, which could cause problems with product performance and which could in turn reduce demand for our software platform, reduce our revenue and lead to product liability claims against us. software products like ours, which consist of hundreds of thousands of lines of code and incorporate licensed software from third parties, may contain errors and/or defects. although we test our software extensively, we have in the past discovered software errors in our products after their introduction. despite testing by us and by our current and potential customers, errors may be found in new products or releases after commercial shipment or deployment begins. this could result in lost revenue, damage to our reputation or delays in market acceptance which could harm our business, operating results and financial condition. we may also have to expend resources to correct these defects. our license agreements with customers typically contain provisions designed to limit our exposure to product liability, warranty and other claims. it is possible, however, that these provisions may not be effective as a result of existing or future laws of certain domestic or international jurisdictions or unfavorable judicial decisions in such jurisdictions, and we may be exposed to product liability, warranty and other claims. if these claims are made, our potential exposure may be substantial given the use of our products in business-critical applications. a successful product liability claim against us could harm our business, operating results and financial condition.we face intense competition which may lead to reduced revenue and loss of market share. the markets for business intelligence software, analytical applications and information management are intensely competitive and subject to rapidly changing technology and evolving standards. in addition, many companies in these markets are offering, or may soon offer, products and services that may compete with our software platform. we face competitors in several broad categories, including business intelligence software, analytical processes, query, search and reporting tools. we compete with large software corporations, including suppliers of enterprise resource planning software that provide one or more capabilities that are competitive with our products, such as ibm (which acquired cognos in 2008), microsoft, oracle (which acquired hyperion solutions in 2007)and sap ag (which acquired business objects in 2008), and with open source business intelligence vendors, including pentaho and jaspersoft. open source software is software that is made widely available by its authors and is licensed as is for a nominal fee or, in some cases, at no charge. as the use of open source software becomes more widespread, certain open source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products. we also compete, or may increasingly in the future compete, with various independent competitors that are primarily focused on business intelligence products, such as actuate, information builders, microstrategy, the sas institute and tibco. we expect additional competition as other established and emerging companies or open source vendors enter the business intelligence software market and new products and technologies are introduced. many of our competitors have longer operating histories, significantly greater financial, technical, marketing or other resources and greater name recognition than we do. in addition, many of our competitors have strong relationships with current and potential customers and extensive knowledge of the business intelligence industry. as a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than us. increased competition may lead to price cuts, fewer customer orders, reduced gross margins, longer sales cycles and loss of market share. we may not be able to compete successfully against current and future competitors, and our business, operating results and financial condition will be harmed if we fail to meet these competitive pressures. 15 current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others. by doing so, these competitors may increase their ability to meet the needs of our potential customers. our current or prospective indirect channel partners may establish cooperative relationships with our current or future competitors. these relationships may limit our ability to sell our software platform through specific distribution channels. accordingly, new competitors or alliances among current and future competitors may emerge and rapidly gain significant market share. these developments could limit our ability to obtain revenues from new customers and to maintain technical support revenues from our installed customer base. if we are unable to compete successfully against current and future competitors, our business, operating results and financial condition would be harmed.if customers demand business intelligence software to be provided via a software as a service business model, our business could be harmed. software as a service, or saas, is a model of software deployment where a software provider typically licenses an application to customers for use as a service on demand through web browser technologies. a saas business model can require a vendor to undertake substantial capital investments and related sales and support resources and personnel. if customers were to require business intelligence software like qlikview to be provided via a saas deployment, we would need to undertake these investments in order to implement this alternative business model. in addition, we would be obligated to apply new revenue recognition policies. even if we undertook these investments, we may be unsuccessful in implementing a saas business model. these factors could harm our business, operating results and financial condition.if we fail to develop our brand cost-effectively, our business may be harmed. we believe that developing and maintaining awareness and integrity of our brand in a cost effective manner are important to achieving widespread acceptance of our existing and future products and are important elements in attracting new customers. we believe that the importance of brand recognition will increase as competition in our market further intensifies. successful promotion of our brand will depend on the effectiveness of our marketing efforts and on our ability to provide reliable and useful products at competitive prices. brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building our brand. we also rely on our customer base and community of end-users in a variety of ways, including to give us feedback on our products and to provide user-based support to our other customers. if we fail to promote and maintain our brand successfully or to maintain loyalty among our customers and qlikcommunity, our user community, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or to retain our existing customers and our business may be harmed.if we are unable to manage our growth effectively, our revenues and profits could be adversely affected. we have recently expanded our operations and employee headcount significantly, and we anticipate that further significant expansion will be required. our future operating results depend to a large extent on our ability to manage this expansion and growth successfully. sustaining our growth will place significant demands on our management as well as on our administrative, operational and financial resources. to manage our growth, we must continue to improve our operational, financial and management information systems and expand, motivate and manage our workforce. if we are unable to manage our growth successfully without compromising our quality of service and our profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our revenues and profits could be harmed. risks that we face in undertaking future expansion include: training new personnel to become productive and generate revenue controlling expenses and investments in anticipation of expanded operations implementing and enhancing our administrative infrastructure, systems and processes addressing new markets expanding operations in the united states and new international regions a failure to manage our growth effectively could harm our ability to market and sell our software platform and maintenance services. if we are unable to recruit or retain skilled personnel, or if we lose the services of any of our key personnel, our business, operating results and financial condition could be harmed. our future success depends on our continuing ability to attract, train and retain highly skilled personnel, and we face intense competition for these employees. we may not be able to retain our current key employees or attract, train or retain other highly skilled personnel in the future. if we lose the services of one or all of these individuals, or if we are unable to attract, train and retain the highly skilled personnel we need, our business, operating results and financial condition could be harmed.future product development is dependent on adequate research and development resources. in order to remain competitive, we must continue to develop new products, applications and enhancements to our existing software platform. this is particularly true as we further expand our product capabilities. maintaining adequate research and development resources, such as the appropriate personnel, talent and development technology, to meet the demands of the market is essential. 1 < 0.1%
 
RISK FACTORS You should carefully consider the risks described below and the other information in this prospectus before deciding to invest in shares of our common stock. If any of these risks actually occur, our business, results of operations and financial condition would likely suffer. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. Risks Related to Support.com We have a history of losses and if we do not become profitable, we may not be able to continue to operateWe incurred net losses of approximately $25.5 million for the period from December 3, 1997, through March 31, 2000. We expect to continue to incur substantial net losses in the future. If we do not become profitable within the timeframe expected by securities analysts or investors, the market price of our stock will likely decline. If we continue to incur net losses, we may not be able to increase our number of employees or our investment in capital equipment, sales, marketing and research and development programs. We do not know when or if we will become profitable. If we do achieve profitability, we may not sustain or increase profitability in the future and may not be able to continue to operate. Our quarterly results are difficult to predict and may fluctuate. If we do not meet quarterly financial expectations, our stock price would likely declineBecause of our limited operating history, our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter. Our operating results in some quarters may fall below the expectations of securities analysts or investors, which would likely cause the market price of our common stock to declineSeveral factors are likely to cause fluctuations in our operating results, including: . demand for our eSupport infrastructure software; . the price and mix of products and services we or our competitors offer; . our ability to retain customers; and . the amount and timing of operating costs and capital expenditures relating to expansion of our business, infrastructure and marketing activities. Our quarterly results depend on the size of a small number of orders, so the delay or loss of any single large order during a quarterly period, and especially an order for a perpetual license rather than a term license, could harm that quarter's results and cause our stock price to declineOur operating results could suffer if any large orders are delayed or cancelled in any future period. Each quarter, we derive a significant portion of our license revenue from a small number of relatively large orders for the licensing of our eSupport infrastructure software. We also license our eSupport infrastructure software under perpetual and term licenses. Perpetual licenses typically result in our recognition of a larger amount of revenue in the quarter in which the license is granted as compared with term licenses. Revenue from a perpetual license is generally recognized upon delivery 7 of a product. Revenue from a term license is recognized on a monthly basis over the agreement term, which is typically three years. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenue. Because a small number of customers has accounted for and may continue to account for substantial portions of our revenue, our revenue could decline because of delays of customer orders or the failure of existing customers to renew licensesFor the first quarter of 2000, Schlumberger accounted for 35% of our total revenue and General Electric accounted for 20% of our revenue. No other single customer accounted for 10% or more of our total revenue for the first quarter of 2000. Because we have a small number of customers and a few customers are likely to continue to account for a significant portion of our revenue, our revenue could decline because of the loss or delay of a single customer order or the failure of an existing customer to renew its term license. We may not obtain additional customers. The failure to obtain additional customers, the loss or delay of customer orders and the failure of existing customers to renew licenses will harm our operating results. We must achieve broad adoption and acceptance of our eSupport products and services or we will not increase our market share or grow our businessWe must achieve broad market acceptance and adoption of our products and services or our business and operating results will suffer. Specifically, we must encourage our customers to transition from using traditional support methods. To accomplish this, we must: . continually improve the performance, features and reliability of our products and services to address changing industry standards and customer needs and . develop integration with other support-related technologies. We must attract and retain qualified personnel, which is particularly difficult for us because we are headquartered in the San Francisco Bay Area, where competition for personnel is extremely intenseIf we fail to retain and recruit the necessary personnel, our ability to develop new products and services and to provide acceptable levels of customer service could suffer. We currently plan to substantially increase our number of employees over the next 12 months. Competition for these personnel is intense, especially in the San Francisco Bay Area. We have had difficulty hiring qualified personnel as quickly as we have desired. Specifically, we may be unable to hire a sufficient number of qualified support, training and engineering professionals. If we hire employees from our competitors, these competitors may claim that we have engaged in unfair hiring practices. We could incur substantial costs in defending ourselves against any of these claims, regardless of their merits. Our product innovations may not achieve the market penetration or price stability necessary for profitabilityIf we fail to develop, in a timely manner, new or enhanced versions of our eSupport infrastructure software or to provide new products and services that achieve rapid and broad market 8 acceptance or price stability, we may not become profitable. We may fail to identify new product and service opportunities successfully. Our existing products will become obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We may have little or no control over the factors that might influence market acceptance of our products and services. These factors include: . the willingness of enterprises to transition to automated support and eSupport and . acceptance of competitors' automated support or eSupport solutions. Our eSupport software may not operate with the hardware and software platforms that are used by our customers now or in the future, and as a result our business and operating results may sufferWe currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. With the exception of our Support Portal, our eSupport infrastructure software is currently available only on Microsoft Windows operating systems. If there is widespread adoption of other operating system environments, or if we fail to release versions of our eSupport infrastructure software that are compatible with these other operating systems, our business and operating results will suffer. Our future success also depends on: . our ability to integrate our product with multiple platforms and to modify our product as new versions of packaged applications are introduced; . the number of different operating systems and databases that our product can work with; and . our management of software being developed by third parties for our customers or for use with our product. We rely on third-party technologies and our inability to use or integrate third-party technologies could delay product or service developmentWe intend to continue to license technologies from third parties including applications used in our research and development activities and technologies, which are integrated into our products and services. Our inability to obtain or integrate any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. These technologies may not continue to be available to us on commercially reasonable terms or at all. We may fail to successfully integrate any licensed technology into our products or services. This would harm our business and operating results. Third-party licenses also expose us to increased risks that include: . risks of product malfunction after new technology is integrated; . the diversion of resources from the development of our own proprietary technology; and . our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs. We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur significant expensesWe may acquire or invest in complementary businesses, technologies or products. For example, we recently entered into an agreement to license technology that relates to problem identification, 9 and as part of the agreement, we have an option to purchase this technology for up to approximately $8 million, which we may or may not exercise. If we are unable to use or integrate any newly acquired entities or technologies effectively or profitably, our operating results could suffer. Future acquisitions by us could also result in large and immediate write-offs, incurrence of debt and contingent liabilities or amortization of expenses related to goodwill and other intangibles, which could harm our operating results. Additional funds to finance any acquisitions may not be available on terms that are favorable to us, or at all, and, in the case of equity financings, may dilute our stockholders. Our recent growth has placed a strain on our management systems, network infrastructure and resources and our failure to manage growth could harm our ability to provide adequate levels of service to our customers, disrupt our operations and delay execution of our business planOur rapid expansion in our personnel, facilities, systems and infrastructure has placed, and we expect that it will continue to place, a significant strain on our management controls, network infrastructure and financial resources. Our failure to manage growth could harm our ability to provide adequate levels of customer service, delay execution of our business plan or disrupt our operations. We expect further significant expansion, including expansion outside the San Francisco Bay Area. We will need to obtain additional office space before the end of 2000, and if we fail to obtain sufficient space, our business operations will be disrupted. We have recently hired a number of new senior management personnel and their failure to integrate effectively may interfere with our operationsOver the last 12 months, we have hired a number of new officers, including our chief executive officer, Radha R. Basu, our chief financial officer, Brian M. Beattie, and our senior vice president of sales and business development, Jim R. Hilbert. These individuals, who have worked together for only a short period of time, must spend a significant amount of time learning our business model and management system while performing their regular duties. The integration of new personnel could disrupt our ongoing operations. Because we do not have long-term employment agreements with most of our key personnel, we may lose their services, which in turn would harm the market's perception of our businessOur success will depend on the skills, experience and performance of our senior management, engineering, sales, marketing and other key personnel. We do not have long-term employment agreements with many of our key employees. The loss of the services of any of our senior management or other key personnel, including our chief executive officer, Radha R. Basu, our chief financial officer, Brian Beattie, our chief technical officer, Scott W. Dale, and our chief software officer, Cadir B. Lee, could harm the market's perception of our business and our ability to achieve our business goals. Our failure to establish and expand our strategic alliances would harm our ability to achieve market acceptance of our eSupport infrastructure softwareIf we fail to maintain, establish or successfully implement strategic alliances, our ability to achieve market acceptance of our eSupport infrastructure software will suffer and our business and operating results will be harmed. Specifically, we must establish and extend existing distribution alliances with specialized technology and services firms such as support outsourcers. We must also 10 establish and extend existing solutions alliances with leading providers of complementary support technologies, including call center or help desk management companies, knowledge management companies and systems management firms. Our eSupport products depend on and work with products containing complex software and if our products fail to perform properly due to errors or similar problems in the software, we may need to spend resources to correct the errors or compensate for losses from these errors and our reputation could be harmedOur eSupport products depend on complex software, both internally developed and licensed from third parties. Also, our customers may use our products with other companies' products which also contain complex software. Complex software often contains errors. These errors could result in: . delays in product shipments; . unexpected expenses and diversion of resources to identify the source of errors or to correct errors; . damage to our reputation; . lost sales; . product liability claims; and . product returns. Our system security is important to our customers and we may need to spend significant resources to protect against or correct problems caused by security breachesA fundamental requirement for online communications, transactions and support is the secure transmission of confidential information. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in security and any breach could harm our business and reputation. Also, computers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to further protect against security breaches or to correct problems caused by any breach. We may face claims of invasion of privacy or inappropriate disclosure, use or loss of our customers' information and any liability imposed could harm our reputation and cause us to lose customersOur software contains features which may allow us or our customers to control, monitor or collect information from computers running the software without notice to the computing users. Therefore we may face claims about invasion of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability could harm our operating results. Our sales cycle can be lengthy and if revenue forecasted for a particular quarter is not realized in that quarter, significant expenses incurred may not be offset by corresponding salesOur sales cycle for our eSupport infrastructure software can range from one week to nine months or more and may vary substantially from customer to customer. While our customers are 11 evaluating our products and services, we may incur substantial sales and marketing expenses and spend significant management effort. Any delay in completing sales in a particular quarter could cause our operating results to be below expectations. We have limited experience in international operations and if our revenue from international operations does not exceed the expense of establishing and maintaining our international operations, our business could sufferWe intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. If we do not generate enough revenue from international operations to offset the expense of these operations, our business could suffer. Risks we face in conducting business internationally include: . difficulties and costs of staffing and managing international operations; . differing technology standards; . longer sales cycles and collection periods; . changes in currency exchange rates and controls; and . dependence on local vendors. Any system failure that causes an interruption in our customers' ability to use our eSupport products or services or a decrease in their performance could harm our relationships with our customers and result in reduced revenueOur eSupport software depends on the uninterrupted operation of our internal and outsourced communications and computer systems. These systems are vulnerable to damage or interruption from computer viruses, human error, natural disasters and intentional acts of vandalism and similar events. We have no formal disaster recovery plan and business interruption insurance may not be enough to compensate us for losses that occur. These problems could interrupt our customers' ability to use our eSupport products or services which could harm our reputation and cause us to lose customers and revenue. We may not obtain sufficient patent protection, and this could harm our competitive position and increase our expenses which would harm our businessOur success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology. It is possible that: . our four pending patent applications may not be issued, . competitors may independently develop similar technologies or design around any of our patents, . patents issued to us may not be broad enough to protect our proprietary rights and . our issued patent could be successfully challenged. 12 We rely upon trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenueWe also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights and our ability to compete and grow our business could suffer if these rights are not adequately protected. Our proprietary rights may not be adequately protected because: . laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies and . policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized useWe have received a letter claiming trademark infringement for the use of eSupport. We have responded that we believe eSupport to be a generic term commonly used throughout the industry Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for it, which would harm our competitive position and market share. We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rightsOther parties may assert intellectual property infringement claims against us and our products may infringe the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming and could divert management's attention from our business. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements which may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Our products may infringe issued patents that may relate to our products. Also, patent applications may have been filed which relate to our software products. Industry Risks We must compete successfully in the eSupport market or we will lose market share and our business will failThe market for our products is intensely competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. Competitive pressures could reduce our market share or require us to reduce the price of products and services and therefore our gross margin, which could harm our business and operating results. Our integrated software solution competes against various vendors' software products designed to accomplish specific elements of a complete eSupport solution. For example, in the market for automated development of support solutions, we compete with companies such as Serena Software, Inc. In the market for automated delivery of support solutions, we compete with Motive Communications, Inc. 13 We may encounter competition from companies such as: . customer communications software companies; . question and answer companies; . customer relationship management solution providers; . consolidated service desk solution vendors; . Internet infrastructure companies; and . operating systems providers. Our potential competitors may have longer operating histories, significantly greater financial, technical, and other resources or greater name recognition than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Because our eSupport infrastructure software is designed to support businesses operating over the Internet, our success depends on the continued growth and levels of performance of Internet usageBecause a majority of our products are designed to support businesses operating over the Internet, the success of our business will depend on the continued improvement of the Internet as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of information by enterprises to their employees and extended enterprise. Because global commerce on the Internet and the online exchange of information is evolving, we cannot predict whether the Internet will continue to be a viable commercial marketplace. Governmental regulation and legal changes could impair the growth of the Internet and decrease demand for our products or increase our cost of doing businessThe laws and regulations that govern our business change rapidly. Any changes in laws and regulations could impair the growth of the Internet and could reduce demand for our products, subject us to liability or increase our cost of doing business. The United States government and the governments of other states and foreign countries have attempted to regulate activities on the Internet and the distribution of software. Also, in 1998, Congress passed the Internet Freedom Act, which imposes a three-year moratorium on state and local taxes on Internet-based transactions. Failure to renew this moratorium would allow various states to impose taxes on e-commerce. This might harm our business directly and indirectly by harming the businesses of our customers, potential customers and business alliances. The applicability to the Internet of existing laws governing issues is uncertain and may take years to resolve. Evolving areas of law that are relevant to our business include privacy law, intellectual property laws, proposed encryption laws, content regulation and sales and use tax laws and regulations. 14 Offering Risks Our stock price may be volatile because we are an eBusiness software company, and you may not be able to sell your shares at or above the offering priceBefore this offering, our common stock has not been publicly traded, and an active trading market may not develop or be sustained after this offering. You may not be able to sell your shares at or above the offering price. The price at which our common stock will trade after this offering is likely to be highly volatile and may fluctuate substantially because of: . actual or anticipated fluctuations in our operating results, . changes in or our failure to meet securities analysts' expectations, . conditions and trends in the Internet and other technology industries and . fluctuations in stock market price and volume, which are particularly common among securities of software and Internet-oriented companies. After this offering, our directors, executive officers and principal stockholders will own 70.5% of our common stock and this concentration of ownership will allow them to elect most of our directors and could delay or prevent a change in control of Support.comAfter this offering, our directors, executive officers and stockholders who currently own over 5% of our common stock will collectively beneficially own approximately 70.5% of our outstanding common stock. These stockholders, if they vote together, will be able to significantly influence all matters requiring stockholder approval. For example, they may be able to elect most of our directors, delay or prevent a transaction in which stockholders might receive a premium over the market price for their shares or prevent changes in control or management. Most of our outstanding shares of common stock may be sold in the market shortly after this offering, which may cause our stock price to declineSales of a substantial number of shares of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market after this offering or after the expiration of lockup and holding periods could cause the market price of our common stock to decline. All the shares sold in this offering will be freely tradable. The remaining 28,854,034 shares of common stock outstanding after this offering are under lock-up agreements that prohibit the sale of the shares for 180 days after the date of this prospectus. Any or all of these shares may be released before expiration of the 180-day lockup period at the discretion of Credit Suisse First Boston Corporation. Immediately after the 180-day lockup period, 11,785,048 shares will become available for sale provided the sale of some shares may be restricted by volume limitations. Our stock price may decline significantly because of stock market fluctuations that affect the prices of technology stocks. A decline in our stock price could result in securities class action litigation against us, that could divert management's attention and harm our businessThe stock market has experienced significant price and volume fluctuations that have affected the market prices for the common stocks of technology companies. These broad market fluctuations may cause the market price of our common stock to decline. After periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation is 15 often expensive and diverts management's attention and resources, which could harm our ability to execute our business plan. We may need additional capital and if funds are not available on acceptable terms, we may not be able to hire and retain employees, fund our expansion or compete effectivelyWe believe that our existing capital resources, including the anticipated proceeds of this offering, will enable us to maintain our operations for at least the next 12 months. However, we may choose to, or be required to, raise additional funds. If our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to hire, train or retain employees, to fund our expansion, take advantage of unanticipated opportunities, develop or enhance services or products, or respond to competitive pressures would be significantly limited. Our management has significant flexibility in using the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. If our management does not use the proceeds in a manner that increases our operating results or market value, our business could sufferOur management will have significant flexibility in applying the net proceeds of this offering. The net proceeds could be applied in ways that do not increase our operating results. We intend generally to use the net proceeds from this offering to repay $2.2 million in debt and for general corporate purposes, including working capital. We also have a source code license agreement that will require minimum license fees of $1 million per quarter for 4 quarters. After the fourth quarter of the arrangement we may cancel the arrangement at any time or continue to pay license fees of $1 million per quarter. We also have an option to acquire the licensed technology. We have not determined the actual expected expenditures and thus cannot estimate the amounts to be used for each specified purpose. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including the amount of cash used in or generated by our operations and the market response to the introduction of any new product and service offerings. Depending on future developments and circumstances, we may use some of the proceeds for purposes other than those described above. We may be liable under state securities laws for shares issued, and option grants made, under our 1998 stock option plan in violation of registration requirements of state securities lawsSome of the shares issued and options granted under our 1998 stock option plan violated state securities laws because these stock issuances and option grants were not exempt from registration or qualification under state securities laws and registration or qualification was not obtained. We may be liable under state securities laws for up to a total amount of approximately $215,000 plus statutory interest of 7% per year. 16 1 < 0.1%
 
risk factors investing in our common stock involves a high degree of risk. you should carefully consider the following risk factors, as well as all of the other information contained in this prospectus including our consolidated financial statements, and the related notes thereto, before deciding to invest in our common stock. the occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations, and cash flow. in such case, the trading price of our common stock could decline and you could lose all or part of your investment. risks relating to our business adverse economic conditions in the united states and worldwide may negatively impact our results. we are subject to changes in general economic conditions that are beyond our control. during periods of economic slowdown such as the recent economic downturn, delinquencies, defaults, repossessions, and losses generally increase while proceeds from auction sales decrease. these periods may also be accompanied by increased unemployment rates, decreased consumer demand for automobiles and other consumer products, and declining values of automobiles and other consumer products securing outstanding accounts, which weaken collateral coverage and increase the amount of a loss in the event of default. additionally, higher gasoline prices, unstable real estate values, reset of adjustable rate mortgages to higher interest rates, general availability of consumer credit, or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles and other consumer products as well as weaken collateral values on certain types of automobiles and other consumer products. because our historical focus has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn. in addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our finance charge income. furthermore, our business is significantly affected by monetary and regulatory policies of the u.s. federal government and its agencies. changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us through interest rate changes, costs of compliance with increased regulation, and other factors. although market conditions have improved, unemployment in the united states continues to remain at elevated levels, and conditions remain challenging for financial institutions. furthermore, certain eurozone member countries have fiscal outlays that exceed their fiscal revenue, which has raised concerns about such countries abilities to continue to service their debt and foster economic growth. a weakened european economy could undermine investor confidence in european financial institutions and the stability of european member economies. notwithstanding its geographic diversification, this could adversely impact santander, with whom we have a significant relationship. such events could also negatively affect u.s.-based financial institutions, counterparties with which we do business, and the stability of the global financial markets. disruptions in the global financial markets have also adversely affected the corporate bond markets, debt and equity underwriting, and other elements of the financial markets. in recent years, downgrades of the sovereign debt of some european countries have resulted in increased volatility in capital markets and have caused some lenders and institutional investors to reduce and, in some cases, cease to provide funding to certain borrowers, including other financial institutions. the impact on available credit, increased volatility in the financial markets, and reduced business activity has adversely affected, and may continue to adversely affect, our businesses, capital, liquidity, or other financial conditions and results of operations, and access to credit. the process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans. the degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the quality of our assets. our business could be negatively impacted if our access to funding is reduced. we rely upon our ability to sell securities in the abs market and upon our ability to access various credit facilities to fund our operations. the abs market, along with credit markets in general, experienced unprecedented disruptions during the recent economic downturn. although market conditions have improved since 2009, for a number of years following the economic downturn, certain issuers experienced increased risk premiums while there was a relatively lower level of investor demand for certain abs (particularly those securities backed by nonprime collateral). in addition, the risk of volatility surrounding the global economic system and uncertainty surrounding regulatory reforms such as the dodd-frank wall street reform and consumer protection act of 2010 (the dodd-frank act) continue to create uncertainty around access to the capital markets. as a result, there can be no assurance that we will continue to be successful in selling securities in the abs market. adverse changes in our abs program or in the abs market generally could materially adversely affect our ability to securitize loans on a timely basis or upon terms acceptable to us. this could increase our cost of funding, reduce our margins or cause us to hold assets until investor demand improves. we also depend on various credit facilities and flow agreements to fund our future liquidity needs. we cannot guarantee that these financing sources will continue to be available beyond the current maturity dates, on reasonable terms, or at all. as our volume of loan acquisitions and originations increases, especially due to our recent relationship with chrysler, we will require the expansion of our borrowing capacity on our existing credit facilities and flow agreements or the addition of new credit facilities and flow agreements. the availability of these financing sources depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial strength and strategic objectives of santander and the other banks that participate in our credit facilities and flow agreements, and the availability of bank liquidity in general. we may also experience the occurrence of events of default or breach of financial covenants, which could reduce our access to bank funding. in the event of a sudden or unexpected shortage of funds in the banking system, we cannot be sure that we will be able to maintain necessary levels of funding without incurring high funding costs, a reduction in the term of funding instruments, or the liquidation of certain assets. we have not experienced a significant increase in risk premiums or cost of funding to date, but we are not isolated from general market conditions that may affect issuers of abs and other borrowers and we could experience increased risk premiums or funding costs in the future. in addition, if the sources of funding described above are not available to us on a regular basis for any reason, we may have to curtail or suspend our loan acquisition and origination activities. downsizing the scale of our business would have a material adverse effect on our financial position, liquidity, and results of operations.we face significant risks in implementing our growth strategy, some of which are outside our control. we intend to continue our growth strategy to (i)expand our vehicle finance franchise by increasing market penetration via the number and depth of our relationships in the vehicle finance market, pursuing additional relationships with oems, and expanding our direct-to-consumer footprint and (ii)grow our unsecured consumer lending platform. our ability to execute this growth strategy is subject to significant risks, some of which are beyond our control, including: the inherent uncertainty regarding general economic conditions; our ability to obtain adequate financing for our expansion plans; the prevailing laws and regulatory environment of each state in which we operate or seek to operate, and, to the extent applicable, federal laws and regulations, which are subject to change at any time; the degree of competition in new markets and its effect on our ability to attract new customers; our ability to recruit qualified personnel, in particular in areas where we face a great deal of competition; and our ability to obtain and maintain any regulatory approvals, government permits, or licenses that may be required on a timely basis. our recent agreement with chrysler may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. in february 2013, we entered into a ten-year master private label financing agreement (the chrysler agreement) with chrysler whereby we launched the chrysler capital brand, which originates private-label loans and leases to facilitate the purchase of chrysler vehicles by consumers and chrysler-franchised automotive dealers. the financing services that we provide under the chrysler agreement, which launched may1, 2013, include credit lines to finance chrysler-franchised dealers acquisitions of vehicles and other products that chrysler sells or distributes, automotive loans and leases to finance consumer acquisitions of new and used vehicles at chrysler-franchised dealerships, financing for commercial and fleet customers, and ancillary services. in addition, we will offer dealers dealer loan financing, construction loans, real estate loans, working capital loans, and revolving lines of credit. in accordance with the terms of the chrysler agreement, in may 2013 we paid chrysler a $150 million upfront, nonrefundable payment, which will be amortized over ten years but would be recognized as expense immediately if the chrysler agreement is terminated in accordance with its terms. as part of the chrysler agreement, we received limited exclusivity rights to participate in specified minimum percentages of certain of chryslers financing incentive programs, which include loan rate subvention and automotive lease residual support subvention. we have committed to certain revenue sharing arrangements, as well as to considering future revenue sharing opportunities. we will bear the risk of loss on loans originated pursuant to the chrysler agreement, but chrysler will share in any residual gains and losses in respect of automotive leases, subject to specific provisions in the chrysler agreement, including limitations on our participation in gains and losses. in addition, under the chrysler agreement, chrysler has the option to acquire, for fair market value, an equity participation in an operating entity through which the financial services contemplated by the chrysler agreement are offered and provided, through either an equity interest in the new entity or participation in a joint venture or other similar business relationship or structure. there is no maximum limit on the size of chryslers potential equity participation. although the chrysler agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that we ultimately receive less than what we believe to be the fair market value for such interest. under the chrysler agreement, we have agreed to specific transition milestones, including market penetration rates, approval rates, and staffing and service milestones for the initial year following launch. if the transition milestones are not met in the first year, the agreement will terminate and we will lose the ability to operate as chrysler capital. if the transition milestones are met, the chrysler agreement will have a ten-year term, subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations under the chrysler agreement. in addition, chrysler may also terminate the agreement, among other circumstances, if (i)we fail to meet certain performance metrics, including certain penetration and approval rate targets, during the term of the agreement, (ii)a person other than santander and its affiliates or our other stockholders owns 20% or more of our common stock and santander and its affiliates own fewer shares of common stock than such person, (iii)we become, control, or become controlled by, an oem that competes with chrysler or (iv)if certain of our credit facilities become impaired. the loans and leases originated through chrysler capital are expected to provide us with the majority of our projected growth over the next several years. our ability to realize the full strategic and financial benefits of our relationship with chrysler depends in part on the successful development of our chrysler capital business, which will require a significant amount of managements time and effort. if we are unable to realize the expected benefits of our relationship with chrysler, or if the chrysler agreement were to terminate, our ability to generate or grow revenues could be reduced, and we may not be able to implement our business strategy, which would negatively impact our future growth. our business could be negatively impacted if we are unsuccessful in developing and maintaining relationships with automobile dealerships. our ability to acquire loans and automotive leases is reliant on our relationships with automotive dealers. in particular, our automotive finance operations depend in large part upon our ability to establish and maintain relationships with reputable automotive dealers that direct customers to our offices or originate loans at the point-of-sale, which we subsequently purchase. although we have relationships with certain automotive dealers, none of our relationships are exclusive and some of them are newly established and they may be terminated at any time. as a result of the recent economic downturn and contraction of credit to both dealers and their customers, there was an increase in dealership closures and our existing dealer base experienced decreased sales and loan volume in the past and may experience decreased sales and loan volume in the future, which may have an adverse effect on our business, results of operations, and financial condition.a reduction in demand for our products and failure by us to adapt to such reduction could adversely affect our business, results of operations, and financial condition. the demand for the products we offer may be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences or financial conditions, regulatory restrictions that decrease customer access to particular products, or the availability of competing products. should we fail to adapt to significant changes in our customers demand for, or access to, our products, our revenues could decrease significantly and our operations could be harmed. even if we do make changes to existing products or introduce new products to fulfill customer demand, customers may resist such changes or may reject such products. moreover, the effect of any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time, and, by that time, it may be too late to make further modifications to such product without causing further harm to our business, results of operations, and financial condition.our financial condition, liquidity, and results of operations depend on the credit performance of our loans. as of september30, 2013, over 80% of our consumer loans are nonprime receivables with obligors who do not qualify for conventional automotive finance products as a result of, among other things, a lack of or adverse credit history, low income levels, and/or the inability to provide adequate down payments. while underwriting guidelines were designed to establish that, notwithstanding such factors, the obligor would be a reasonable credit risk, the receivables nonetheless will experience higher default rates than a portfolio of obligations of prime obligors. in the event of such a default on an auto loan, generally the most practical alternative is repossession of the financed vehicle, although the collateral value of the vehicle usually does not cover the outstanding account balance and costs of recovery. repossessions and foreclosure sales that do not yield sufficient proceeds to repay the receivables in full could result in losses on those receivables. we repossessed 175,665 vehicles, incurring $1.0 billion in net losses, during the year ended december31, 2012, of which 164,625 repossessions and $946million of net losses were on nonprime receivables. we experienced a default rate of 5.62% for nonprime receivables and 2.68% for prime receivables during the year ended december31, 2012. from time to time we are the subject of unfavorable news or editorial coverage and we, like many peer companies, are the subject of various complaint websites in connection with our repossession and collection activities. regardless of merit, this type of negative publicity could damage our reputation and lead consumers to choose other consumer finance companies. this could, in turn, lead to decreased business which could have a material adverse impact on our financial position. we do not believe we have experienced any such impact as our lending is primarily indirect, with the end consumer interacting directly with a dealer rather than the finance company. in addition, our prime portfolio is rapidly growing. while prime portfolios typically have lower default rates than nonprime portfolios, we have less ability to make risk adjustments to the pricing of prime loans compared to nonprime loans. as a result, a larger proportion of our business will consist of loans with respect to which we have less flexibility to adjust pricing to absorb losses. as a result of these factors, we may sustain higher losses than anticipated in our prime portfolio. we depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, results of operations, and financial condition. in deciding whether to approve loans or to enter into other transactions with borrowers and counterparties in our retail lending and commercial lending businesses, we may rely on information furnished to us by or on behalf of borrowers and counterparties, including financial statements and other financial information. we also may rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. if any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected. whether a misrepresentation is made by the loan applicant, another third party, or one of our employees, we generally bear the risk of loss associated with the misrepresentation. our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or from our business clients. any such misrepresented information could adversely affect our business, financial condition, and results of operations.loss of our key management or other personnel, or an inability to attract such management and other personnel, could negatively impact our business. the successful implementation of our growth strategy depends in part on our ability to retain our experienced management team and key employees and on our ability to attract appropriately qualified new personnel as well as have an effective succession planning framework in place. for instance, our chief executive officer is one of the founders of scusa and has extensive experience in the vehicle finance industry. he has a proven track record of successfully operating our business, including by leading us through the recent economic downturn. the loss of any key member of our management team or other key employees could hinder or delay our ability to implement our growth strategy effectively. further, if we are unable to attract appropriately qualified new personnel as we expand, we may not be successful in implementing our growth strategy. in either instance, our profitability and financial performance could be adversely affected. see management for more detail on our executive officers.future changes in our relationship with santander may adversely affect our operations. santander, through shusa, owns 224,890,292 shares (approximately 65%) of our common stock. we rely on our relationship with santander, through shusa, for several competitive advantages including relationships with oems and regulatory best practices. santander also provides us with significant funding support, through both committed liquidity and opportunistic extensions of credit. during the recent financial downturn, santander and its affiliates provided us with over $6 billion in financing that enabled us to pursue several acquisitions and/or conversions of vehicle loan portfolios at a time when most major banks were curtailing or eliminating their commercial lending activities. if, after this offering, santander or shusa elects not to provide such support or provide it to the same degree, we may not be able to replace such support ourselves or to obtain substitute arrangements with third parties. we may be unable to obtain such support because of financial or other constraints or be unable to implement substitute arrangements on a timely basis on terms that are comparable, or at all, which could adversely affect our operations. furthermore, subject to certain limitations in a shareholders agreement to be entered into among scusa, the principal stockholders, and mr.dundon in connection with consummation of this offering (the shareholders agreement), which will replace the existing shareholders agreement among these parties, santander is permitted to sell its interest in us. if santander reduces its equity interest in us, it may be less willing to provide us with the support it has provided in the past. in addition, our right to use the santander name is on the basis of a non-exclusive, royalty-free, and non-transferable license from santander, and further only extends to uses in connection with our current and future operations within the united states. santander may terminate such license at any time santander ceases to own, directly or indirectly, 50% or more of our common stock. if we were required to change our name, we would incur the administrative costs and time associated with revising legal 17 documents and marketing materials, and also may experience loss of brand and loss of business or loss of funding due to consumers and banks relative lack of familiarity with our new name. additionally, chrysler may terminate the chrysler agreement if a person other than santander and its affiliates or our other stockholders owns 20% or more of our common stock and santander and its affiliates own fewer shares of common stock than such person. santander has provided guarantees on the covenants, agreements, and our obligations under the governing documents of our warehouse facilities and privately issued amortizing notes. these guarantees are limited to our obligations as servicer. some terms of our credit agreements are influenced by, among other things, the credit ratings of santander. if santander were to suffer credit ratings downgrades or other adverse financial developments, we could be negatively impacted, either directly or indirectly. santanders short-term credit ratings downgrades in 2012, from a-1 to a-2 (standard& poors) and from p-1 to p-2 (moodys), did not directly impact our cost of funds. however, due to the contractual terms of certain of our debt agreements, these downgrades resulted in the loss of our ability to commingle funds. the loss of commingling increased the amount of funds we were required to borrow, thereby indirectly raising our cost of funds by approximately $1 million per month. in addition, because of the methodologies applied by credit ratings agencies, our securitization ratings in our abs offerings are indirectly tied to santanders credit ratings. santander applies certain standardized banking policies, procedures and standards across its affiliated entities, including with respect to internal audit credit approval, governance risk management, and compensation practices. we currently follow certain of these santander policies and may in the future become subject to additional santander policies, procedures and standards, which could result in changes to our practices. it is also possible that our continuing relationship with santander or shusa after the consummation of this offering could reduce the willingness of other banks to develop relationships with us due to general competitive dynamics among such banks.negative changes in the business of the oems with which we have strategic relationships, including chrysler, could adversely affect our business. a significant adverse change in chryslers or other automotive manufacturers business, including (i)significant adverse changes in their respective liquidity position and access to the capital markets, (ii)the production or sale of chrysler or other automotive manufacturers vehicles (including the effects of any product recalls), (iii)the quality or resale value of chrysler or other vehicles, (iv)the use of marketing incentives, (v)chryslers or other automotive manufacturers relationships with their key suppliers, or (vi)chryslers or other automotive manufacturers respective relationships with the united auto workers and other labor unions and other factors impacting automotive manufacturers or their employees could have a material adverse effect on our profitability and financial condition. under the chrysler agreement, we originate private-label loans and leases to facilitate the purchase of chrysler vehicles by consumers and chrysler-franchised automotive dealers. in the future, it is possible that chrysler or other automotive manufacturers with whom we have relationships could utilize other companies to support their financing needs, including offering products or terms that we would not or could not offer, which could have a material adverse impact on our business and operations. furthermore, chrysler or other automotive manufacturers could expand or establish or acquire captive finance companies to support their financing needs thus reducing their need for our services. there is no assurance that the global automotive market, or chryslers or our other oem partners share of that market, will not suffer downturns in the future, and any negative impact could in turn have a material adverse effect on our business, results of operations, and financial position. our information technology may not support our future volumes and business strategies. we rely on our proprietary origination and servicing platforms that utilize database-driven software applications, including nearly 20 years of internal historical credit data and extensive third-party data, to continuously adapt our origination and servicing operations to evolving consumer behavior and to new vehicle finance and consumer loan products. we employ an extensive team of engineers, information technology analysts, and website designers to ensure that our information technology systems remain on the cutting edge. however, due to the continued rapid changes in technology, there can be no assurance that our information technology solutions will continue to be adequate for the business or to provide a competitive advantage. our network and information systems are important to our operating activities and any network and information system shutdowns could disrupt our ability to process loan applications, originate loans, or service our existing loan portfolios, which could have a material adverse impact on our operating activities. shutdowns may be caused by unforeseen catastrophic events, including natural disasters, terrorist attacks, large-scale power outages, software or hardware defects, computer viruses, cyber attacks, external or internal security breaches, acts of vandalism, misplaced or lost data, programming or human errors, difficulties in migrating technology facilities from one location to another, or other similar events. although we maintain, and regularly assess the adequacy of, a disaster recovery plan designed to effectively manage the effects of such unforeseen events, we cannot be certain that such plan will function as intended, or otherwise resolve or compensate for such effects. such a failure of our disaster recovery plan, if and when experienced, may have a material adverse effect on our revenue and ability to support and service our customer base.we are required to make significant estimates and assumptions in the preparation of our financial statements and our estimates and assumptions may not be accurate. the preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the united states of america (gaap) requires our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. we also use estimates and assumptions in determining the residual values of leased vehicles. critical estimates are made by management in determining, among other things, the allowance for loan losses, amounts of impairment, and valuation of income taxes. if our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely affected.our allowance for loan losses and impairments may prove to be insufficient to absorb probable losses inherent in our loan portfolio. we maintain an allowance for loan losses, a reserve established through a provision for loan losses charged to expense, that we believe is appropriate to provide for probable losses inherent in our originated loan portfolio. for receivables portfolios purchased from other lenders at a discount to the aggregate principal balance of the receivables, the portion of the discount that was attributable to credit deterioration since origination of the loans is recorded as a nonaccretable difference. any deterioration in the performance of the purchased portfolios after acquisition results in incremental impairment reserves. our allowance for loan losses has increased from $347million, or 5.5% of outstanding principal balance, at december31, 2008, to $2.4 billion, or 9.7% of outstanding principal balance, at september30, 2013. the determination of the appropriate level of the allowance for loan losses, impairment reserves, and nonaccretable difference inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which are subject to change. changes in economic conditions affecting borrowers, new information regarding our loans, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. furthermore, growth in our loan portfolio generally would lead to an increase in the provision for loan losses. some of our planned growth is in lending areas other than vehicle loans, and we are not experienced in estimating loan and credit losses in those other areas. in addition, if net charge-offs in future periods exceed the 19 allowance for loan losses, we will need to make additional provisions to increase the allowance for loan losses. there is no accurate method for predicting loan and credit losses, and we cannot assure y 1 < 0.1%
 
Other values (3047) 3047 91.5%
 
(Missing) 273 8.2%
 
Max length32767
Mean length28462.92252
Min length3
Contains charsTrue
Contains digitsTrue
Contains spacesTrue
Contains non-wordsTrue

roa
Numeric

Distinct count2932
Unique (%)88.0%
Missing (%)11.8%
Missing (n)392
Infinite (%)0.0%
Infinite (n)0
Mean-0.1273795482
Minimum-12.45948946
Maximum1.78130217
Zeros (%)< 0.1%
Mini histogram

Quantile statistics

Minimum-12.45948946
5-th percentile-0.6556836903
Q1-0.2069382406
Median-0.005948718697
Q30.04325948379
95-th percentile0.152261726
Maximum1.78130217
Range14.24079163
Interquartile range0.2501977244

Descriptive statistics

Standard deviation0.4525257137
Coef of variation-3.552577474
Kurtosis261.8163367
Mean-0.1273795482
MAD0.2222233922
Skewness-12.13976851
Sum-374.2411127
Variance0.2047795216
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
0.03049457589 4 0.1%
 
-0.6556836903 2 0.1%
 
-0.3417159919 2 0.1%
 
-0.5949809886 2 0.1%
 
-0.2529246993 2 0.1%
 
0.07369627507 1 < 0.1%
 
-0.8387723388 1 < 0.1%
 
-0.2558480372 1 < 0.1%
 
0.1349469496 1 < 0.1%
 
-0.0165052662 1 < 0.1%
 
Other values (2921) 2921 87.7%
 
(Missing) 392 11.8%
 

Minimum 5 values

ValueCountFrequency (%) 
-12.45948946 1 < 0.1%
 
-9.164893617 1 < 0.1%
 
-6.164203085 1 < 0.1%
 
-4.577086882 1 < 0.1%
 
-4.093584906 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
1.78130217 1 < 0.1%
 
0.7253003635 1 < 0.1%
 
0.6492075851 1 < 0.1%
 
0.5674022628 1 < 0.1%
 
0.5324116886 1 < 0.1%
 

sharesOfferedPerc
Numeric

Distinct count2199
Unique (%)66.0%
Missing (%)7.9%
Missing (n)262
Infinite (%)0.0%
Infinite (n)0
Mean30.14595828
Minimum0.39
Maximum100
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum0.39
5-th percentile10.5035
Q118.62
Median25.72
Q335.44
95-th percentile73.6525
Maximum100
Range99.61
Interquartile range16.82

Descriptive statistics

Standard deviation18.29188517
Coef of variation0.6067773662
Kurtosis3.595483208
Mean30.14595828
MAD12.85673676
Skewness1.799120493
Sum92487.8
Variance334.5930629
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
100 27 0.8%
 
86.96 11 0.3%
 
12.61 6 0.2%
 
19.34 5 0.2%
 
26.83 5 0.2%
 
18.56 5 0.2%
 
22.49 5 0.2%
 
25.11 5 0.2%
 
22.79 5 0.2%
 
21.05 5 0.2%
 
Other values (2188) 2989 89.8%
 
(Missing) 262 7.9%
 

Minimum 5 values

ValueCountFrequency (%) 
0.39 1 < 0.1%
 
1.02 1 < 0.1%
 
1.07 1 < 0.1%
 
1.42 1 < 0.1%
 
1.45 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
100 27 0.8%
 
99.93 1 < 0.1%
 
99.88 1 < 0.1%
 
99.86 1 < 0.1%
 
99.82 1 < 0.1%
 

sp2weeksBefore
Highly correlated

This variable is highly correlated with nasdaq2weeksBefore and should be ignored for analysis

Correlation0.964605601

totalAssets
Numeric

Distinct count2951
Unique (%)88.6%
Missing (%)10.7%
Missing (n)357
Infinite (%)0.0%
Infinite (n)0
Mean1461.073875
Minimum0.99
Maximum293030
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum0.99
5-th percentile18.938
Q166.23
Median154.725
Q3551.256
95-th percentile3734.0922
Maximum293030
Range293029.01
Interquartile range485.026

Descriptive statistics

Standard deviation11017.364
Coef of variation7.540593392
Kurtosis396.4657826
Mean1461.073875
MAD2109.264743
Skewness18.6287398
Sum4343772.629
Variance121382309.6
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
11707 4 0.1%
 
116.58 2 0.1%
 
139.611 2 0.1%
 
153.031 2 0.1%
 
56.795 2 0.1%
 
23.965 2 0.1%
 
104.308 2 0.1%
 
5.406 2 0.1%
 
281.771 2 0.1%
 
116.661 2 0.1%
 
Other values (2940) 2951 88.6%
 
(Missing) 357 10.7%
 

Minimum 5 values

ValueCountFrequency (%) 
0.99 1 < 0.1%
 
1.266 1 < 0.1%
 
1.797 1 < 0.1%
 
1.825 1 < 0.1%
 
2.139 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
293030 1 < 0.1%
 
255018 1 < 0.1%
 
221023.2 1 < 0.1%
 
220797 1 < 0.1%
 
151828 1 < 0.1%
 

totalProceeds
Highly correlated

This variable is highly correlated with ipoSize and should be ignored for analysis

Correlation0.9951531237

totalRevenue
Numeric

Distinct count2760
Unique (%)82.9%
Missing (%)11.3%
Missing (n)375
Infinite (%)0.0%
Infinite (n)0
Mean556.6838717
Minimum-18.834
Maximum135592
Zeros (%)5.3%
Mini histogram

Quantile statistics

Minimum-18.834
5-th percentile0
Q119.7255
Median73.667
Q3274.8985
95-th percentile2119.3281
Maximum135592
Range135610.834
Interquartile range255.173

Descriptive statistics

Standard deviation3152.987979
Coef of variation5.663875207
Kurtosis1160.88751
Mean556.6838717
MAD771.4545387
Skewness29.07194647
Sum1645000.841
Variance9941333.199
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=50)
ValueCountFrequency (%) 
0 176 5.3%
 
8268 4 0.1%
 
0.686 3 0.1%
 
4.436 2 0.1%
 
3207.7 2 0.1%
 
0.191 2 0.1%
 
49.352 2 0.1%
 
0.869 2 0.1%
 
173.911 2 0.1%
 
8.57 2 0.1%
 
Other values (2749) 2758 82.8%
 
(Missing) 375 11.3%
 

Minimum 5 values

ValueCountFrequency (%) 
-18.834 1 < 0.1%
 
0 176 5.3%
 
0.008 1 < 0.1%
 
0.01 1 < 0.1%
 
0.012 1 < 0.1%
 

Maximum 5 values

ValueCountFrequency (%) 
135592 1 < 0.1%
 
42249 1 < 0.1%
 
31947 1 < 0.1%
 
29682 1 < 0.1%
 
27177 1 < 0.1%
 

vc
Boolean

Distinct count2
Unique (%)0.1%
Missing (%)0.0%
Missing (n)0
False
1909
True
1421
ValueCountFrequency (%) 
False 1909 57.3%
 
True 1421 42.7%
 

year
Numeric

Distinct count23
Unique (%)0.7%
Missing (%)0.0%
Missing (n)0
Infinite (%)0.0%
Infinite (n)0
Mean2005.031832
Minimum1996
Maximum2018
Zeros (%)0.0%
Mini histogram

Quantile statistics

Minimum1996
5-th percentile1997
Q11999
Median2004
Q32012
95-th percentile2017
Maximum2018
Range22
Interquartile range13

Descriptive statistics

Standard deviation7.062196879
Coef of variation0.003522236788
Kurtosis-1.263729148
Mean2005.031832
MAD6.202863043
Skewness0.4040023718
Sum6676756
Variance49.87462476
Memory size26.1 KiB
Histogram
Histogram with fixed size bins (bins=23)
Histogram
Histogram with variable size bins (bins=[1996. 1997.5 1998.5 2000.5 2003.5 ... 2009.5 2012.5 2014.5 2017.5 2018. ], "bayesian blocks" binning strategy used)
ValueCountFrequency (%) 
1997 371 11.1%
 
1999 362 10.9%
 
2000 292 8.8%
 
1998 218 6.5%
 
2014 205 6.2%
 
2004 174 5.2%
 
1996 157 4.7%
 
2013 154 4.6%
 
2007 150 4.5%
 
2006 150 4.5%
 
Other values (13) 1097 32.9%
 

Minimum 5 values

ValueCountFrequency (%) 
1996 157 4.7%
 
1997 371 11.1%
 
1998 218 6.5%
 
1999 362 10.9%
 
2000 292 8.8%
 

Maximum 5 values

ValueCountFrequency (%) 
2018 137 4.1%
 
2017 106 3.2%
 
2016 69 2.1%
 
2015 118 3.5%
 
2014 205 6.2%
 

Correlations

Missing values

Sample

First rows

ageamountOnProspectusblueSkybookValuecitycloseDay1commonEquitycommonEquity.1dj2weeksBeforeegcexchangehighTechhtmlindustryFF12industryFF48industryFF5investmentReceivedipoSizeissuerleveragemanagementFeemanagernasdaq2weeksBeforenetIncomenExecutivesnPatentsnUnderwritersnVCsofferPricepatRatiopepriorFinancingprominencereputationAvgreputationLeadAvgreputationLeadMaxreputationSumrfroasharesOfferedPercsp2weeksBeforetotalAssetstotalProceedstotalRevenuevcyear
05.077.58000.0219.134116SAN JOSE35.5625NaN100.0011112.72FalseNASDQTrueFalseBusiness Equipment -- Computers, Software, and Electronic EquipmentElectronic EquipmentBusiness Equipment, Telephone and Television Transmission64190.068114956.0Numerical Technologies Inc0.000000924417.0Credit Suisse First Boston Corp4963.03-48.8115.01145.014.00.492063False64190.017.5724299.00109.001106.014RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If the key markets within the semiconductor industry, especially semiconductor manufacturers, do not adopt our proprietary technologies and software products, we may be unable to generate sales of our productsThe four key markets within the semiconductor industry are semiconductor designers and design tool vendors, photomask manufacturers, semiconductor equipment manufacturers and semiconductor manufacturers. If these key markets do not adopt our proprietary technologies and software products, our product sales could decline. We design our technologies and products so that each key market within the semiconductor industry can work efficiently with the other markets. For example, if designers do not adopt our technologies and products, it will be more difficult for them to design semiconductors which are understood and processed efficiently by mask manufacturers that do adopt our technologies and products. In addition, we believe semiconductor manufacturers need to adopt our proprietary technologies and software products first in order to drive adoption by the other three markets. Semiconductor manufacturers define and develop the manufacturing process. While designers, mask manufacturers and equipment manufacturers are not required to adopt our technologies and products in order to work with semiconductor manufacturers that do adopt them, the efficiency of the entire manufacturing process is greatly diminished if they do not. If each key market of the semiconductor industry does not perceive our proprietary technologies and software products as the industry standard, our technologies and products could become less valuable and more difficult to license. Factors that may limit adoption of our subwavelength solution within the markets include: . our current and potential industry partners and customers may fail to adopt our technologies and products; . semiconductor designers may not need subwavelength processes if there is a slowdown in semiconductor manufacturing or a decrease in the demand for smaller semiconductor feature sizes; and . the industry may develop alternative methods to produce subwavelength features with existing capital equipment due to a rapidly evolving market and the likely emergence of new technologies. In order for potential industry partners and customers to adopt, and expend their own resources to implement, our technologies and products, we must expend significant marketing resources, with no guarantee of successOur proprietary technologies and software products involve a new approach to the subwavelength gap problem. As a result, we must employ intensive and sophisticated marketing and sales efforts to educate prospective industry partners and customers about the benefits of our technologies and products, with no guarantee of success. Our sales and marketing expenses increased from $1.4 million in 1998 to $4.3 million in 1999. In addition, even if our industry partners and customers adopt our proprietary technologies and software products, they must devote the resources necessary to fully integrate our technologies and products into their operations. This is especially true for our industry partners so that they can begin to resell and market our solution to their customers. If they do not make these expenditures, establishing our technologies and products as the industry standard to the subwavelength gap problem will be difficult. Our limited operating history and dependence on new technologies make it difficult to evaluate our future prospectsWe only have a limited operating history on which you can base your evaluation of our business. We face a number of risks as an emerging company in a new market. For example, the key markets within the 7 semiconductor industry may fail to adopt our proprietary technologies and software products, or we may not be able to establish distribution channels. Our company incorporated in October 1995. In February 1997, we shipped our initial software product, IC Workbench. We have only recently begun to expand our operations significantly. For example, we grew from 47 employees as of January 1, 1999 to 105 employees as of January 1, 2000. We have a history of losses, we expect to incur losses in the future and we may be unable to achieve profitabilityWe may not achieve profitability if our revenue increases more slowly than we expect or not at all. In addition, our operating expenses are largely fixed, and any shortfall in anticipated revenue in any given period could cause our operating results to decrease. We have not been profitable in any quarter, and our accumulated deficit was approximately $16.2 million as of December 31, 1999. We expect to continue to incur significant operating expenses in connection with increased funding for research and development and expansion of our sales and marketing efforts. In addition, we expect to incur additional noncash charges relating to amortization of intangibles and deferred stock compensation. As a result, we will need to generate significant revenue to achieve and maintain profitability. If we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Any of the factors discussed above could cause our stock price to decline. We recently acquired Transcription Enterprises Limited and if we are not successful in integrating Transcription's products and operations with ours, our revenue and operating results could declineOur recent acquisition of Transcription Enterprises Limited will only be successful if we are able to integrate its operations with ours, which could substantially divert management's attention from the day-to-day operations of the combined company. If we encounter any difficulties in the transition process, the revenue and operating results of the combined company could decline. We must successfully integrate Transcription's products with ours. We must also coordinate our research and development and sales and marketing efforts to realize the technological benefits of this combinationWe may find it difficult to integrate personnel with disparate business backgrounds and combine two different corporate cultures. In addition, the process of combining our company with Transcription could interrupt the activities of either or both of the companies' businesses. It is possible that we will not be able to retain key Transcription management, technical and sales personnelIn addition, the acquisition of Transcription could cause our industry partners and customers to be uncertain about our ability to support the combined companies' products and the direction of the combined companies' product development efforts. As a result, they may delay or cancel product orders, which could significantly decrease our revenue and limit our ability to implement our combined business strategy. Our acquisition of Transcription may increase the focus of the semiconductor industry on the manufacturing data preparation market, which could lead to a rapid and substantial increase in competitionOur recent acquisition of Transcription may increase the semiconductor industry's awareness of the market for manufacturing data preparation software, which could lead to a substantial increase in the number of start-up companies that focus on software solutions for data preparation. Manufacturing data preparation software translates semiconductor designs into instructions that control manufacturing equipment. Potential competitors could pursue and execute partnership agreements with key industry partners we intend to pursue, which could make it difficult or impossible for us to develop relationships with these potential industry partners. In addition, some of our current competitors may increase their own research and development budgets relating to data preparation, or may more aggressively market competing solutions. 8 If we do not continue to introduce new technologies and software products or product enhancements ahead of rapid technological change in the market for subwavelength solutions, our operating results could decline and we could lose our competitive positionWe must continually devote significant engineering resources to enable us to introduce new technologies and software products or product enhancements to address the evolving needs of key markets within the semiconductor industry in solving the subwavelength gap problem. We must introduce these innovations and the key markets within the semiconductor industry must adopt them before changes in the semiconductor industry, such as the introduction by our current and potential competitors of more advanced products or the emergence of alternative technologies, render the innovations obsolete, which could cause us to lose our competitive position. These innovations are inherently complex, require long development cycles and a substantial investment before we can determine their commercial viability. Moreover, designers, mask manufacturers and equipment manufacturers must each respond to the demand of the market to design and manufacture masks and equipment for increasingly smaller and complex semiconductors. Our innovations must be viable and meet the needs of these key markets within the semicondutor industry before the consumer market demands even smaller semiconductors, rendering the innovations obsolete. We may not have the financial resources necessary to fund any future innovations. In addition, any revenue that we receive from enhancements or new generations of our proprietary technologies and software products may be less than the costs of development. Fluctuations in our quarterly operating results may cause our stock price to declineIt is likely that our future quarterly operating results may fluctuate from time to time and may not meet the expectations of securities analysts and investors in some future period. As a result, the price of our common stock could decline. Historically, our quarterly operating results have fluctuated. We may experience significant fluctuations in future quarterly operating results. The following factors may cause these fluctuations: . the timing and structure of our product license agreements; . changes in our pricing policies or those of our competitors; and . changes in the level of our operating expenses to support our projected growth. We intend to pursue new, and maintain our current, industry partner relationships, which could substantially divert management attention and resources, with no guarantee of successWe expect to derive significant benefits, including increased revenue and customer awareness, from our current and potential industry partner relationships. In our pursuit to maintain and establish partner relationships within each of the key markets in the semiconductor industry, we could expend significant management attention, resources and sales personnel efforts, with no guarantee of success. To establish and maintain our partner relationships, we expend our limited financial resources on increasing our sales and business development personnel, trade shows and marketing within trade publications. If we did not have to pursue potential industry partners, we could focus these resources exclusively on direct sales to our customers. In addition, through our partner relationships, our partners resell, market, either jointly with us or unilaterally, and promote our technologies and products. If these relationships terminate, such as due to our material breach of the contracts or the partners' election to cancel the contract, which generally is permissible with prior notice to us, we would have to increase our own limited marketing and sales resources for these activities. Further, we may be unable to enter into new industry partner relationships if any of the following occur: . current or potential industry partners develop their own solutions to the subwavelength gap problem; or . our current or potential competitors establish relationships with industry partners with which we seek to establish a relationship. 9 We have only recently entered into many of our current partner relationships. These relationships may not continue or they may not be successful. We also may be unable to find suitable additional industry partners. To date, we have entered into agreements with industry partners, including: . Cadence in the design market; . DuPont Photomask and Photronics in the mask manufacturing market; and . Applied Materials, KLA-Tencor and Zygo Corporation in the semiconductor equipment market. Many of our current competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do and as a result, they may acquire a significant market share before we Our current competitors, or alliances among these competitors, may rapidly acquire significant market share. These competitors may have greater name recognition and more customers which they could use to gain market share to our detriment. We encounter direct competition from other direct providers of phase shifting, OPC and manufacturing data technologies. These competitors include such companies as Avant! and Mentor Graphics. We also compete with companies that have developed or have the ability to develop their own proprietary phase shifting and OPC solutions, such as IBM. These companies may wish to promote their internally developed products and may be reluctant to purchase products from us or other independent vendors. Our competitors may offer a wider range of products than we do and thus may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. These competitors may also be able to undertake more extensive promotional activities, offer more attractive terms to customers than we do and adopt more aggressive pricing policies. Moreover, our competitors may establish relationships among themselves or with industry partners to enhance their services, including industry partners with which we may desire to establish a relationship. The market for software solutions that address the subwavelength gap problem is new and rapidly evolving. We expect competition to intensify in the future, which could slow our ability to grow or execute our strategyWe believe that the demand for solutions to the subwavelength gap problem may encourage many competitors to enter into our market. As the market for software solutions to the subwavelength gap problem proliferates, if our competitors are able to attract industry partners or customers on a more accelerated pace than we can and retain them more effectively, we would not be able to grow and execute our strategy as quickly. In addition, if customer preferences shift away from our technologies and software products as a result of the increase in competition, we must develop new proprietary technologies and software products to address these new customer demands. This could result in the diversion of management attention or our development of new technologies and products may be blocked by other companies' patents. We must offer better products, customer support, prices and response time, or a combination of these factors, than those of our potential competitors. We are growing rapidly and must effectively manage and support our growth in order for our business strategy to succeedWe have grown rapidly and will need to continue to grow in all areas of operation. If we are unable to successfully integrate and support our existing and new employees into our operations, we may be unable to implement our business strategy in the time frame we anticipate, or at all. Due to our rapid growth in headcount, we outgrew our principal office facilities earlier than we expected. As a result, we recently relocated to San Jose, California and may need to relocate to a larger facility in the future, which could be difficult in the very competitive Silicon Valley office leasing market. In addition, building and managing the support necessary for our growth places significant demands on our management as well as our limited revenue. These demands have, and may continue to, divert these resources away from the continued growth of our business and 10 implementation of our business strategy. Further, we must adequately train our new personnel, especially our technical support personnel, to adequately, and accurately, respond to and support our industry partners and customers. If we fail to do this, it could lead to dissatisfaction among our partners or customers, which could slow our growth. We must continually attract and retain engineering personnel or we will be unable to execute our business strategyWe have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our rapid growth and expansion. We must continually enhance and introduce new generations of our phase shifting and OPC technologies. As a result, our future success depends in part on our ability to identify, attract, retain and motivate qualified engineering personnel with the requisite educational background and industry experience. If we lose the services of a significant number of our engineers, it could disrupt our ability to implement our business strategy. Competition for qualified engineers is intense, especially in the Silicon Valley where we are located. Our chief executive officer and chief technology officer, as well as the co- founders of Transcription, are critical to our business and they may not remain with us in the futureOur future success will depend to a significant extent on the continued services of Y. C. (Buno) Pati, our President and Chief Executive Officer, Yao- Ting Wang, our Chief Technology Officer, Roger Sturgeon, one of our directors and a senior executive of Transcription and Kevin MacLean, Vice President and General Manager of Transcription. If we lose the services of any of these key executives, it could slow our product development processes and searching for their replacements could divert our other senior management's time and increase our operating expenses. In addition, our industry partners and customers could become concerned about our future operations, which could injure our reputation. We do not have long-term employment agreements with these executives and we do not maintain any key person life insurance policies on their lives. If we fail to protect our intellectual property rights, competitors may be able to use our technologies which could weaken our competitive position, reduce our revenue or increase our costsOur success depends heavily upon proprietary technologies, specifically our patent portfolio. The rights granted under our patents and patent applications may not provide competitive advantages to us. In addition, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Litigation could also divert our resources, including our managerial and engineering resources. We rely primarily on a combination of patents, copyrights, trademarks and trade secrets to protect our proprietary rights and prevent competitors from using our proprietary technologies in their products. These laws and procedures provide only limited protection. We have been issued two U.S. patents, have five U.S. patent applications currently pending in the U.S. and nine foreign patent applications currently pending in selected foreign countries. Our pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies. Also, patent protection in foreign countries may be limited or unavailable where we have filed for and need such protection. Furthermore, if we fail to adequately protect our trademark rights, this could impair our brand identity and ability to compete effectively. If we do not successfully protect our trademark rights, this could force us to incur costs to re-establish our name or our product names, including significant marketing activities. If third parties assert that our proprietary technologies and software products infringe their intellectual property rights, this could injure our reputation and limit our ability to license or sell our proprietary technologies or software productsThird parties, for competitive or other reasons, could assert that our proprietary technologies and software products infringe their intellectual property rights. These claims could injure our reputation and decrease or 11 block our ability to license or sell our software products. For example, on March 14, 2000, ASML MaskTools, Inc. filed a complaint alleging we infringe two U.S. patents and have committed unfair or fraudulent business practice under the California Business and Professions Code. We are currently investigating the patents and allegations. The defense of these claims could divert management's attention from the day to day operations of our company, as well as divert resources from current planned uses, such as hiring and supporting additional engineering personnel. Litigation is inherently uncertain, and an adverse decision could limit our ability to offer some features in our OPC product. Third parties have advised us of literature which they believe to be relevant to our patents. We have not reviewed all of the information contained in this literature. It is possible that this literature or literature we may be advised of in the future could negatively affect the scope or enforceability of our present or future patents, and/or result in costly litigation. In addition, we are aware of and are evaluating certain patents with which our products, patents or patent applications may conflict. If any of these patents are found to be valid, and we are unable to license such patents on reasonable terms, or if our products, patents, or patent applications are found to conflict with these patents, we could be prevented from selling our products, our patents may be declared invalid or our patent applications may not result in issued patents. In addition, a company could invite us to take a patent license. If we do not take the license, the requesting company could contact our industry partners or customers and suggest that they not use our software products because we are not licensed under their patents. This action by the requesting company could affect our relationships with these industry partners and customers and may prevent future industry partners and customers from licensing our software products. The intensely competitive nature of our industry and the important nature of our technologies to our competitors' businesses may contribute to the likelihood of being subject to third party claims of this nature. Please see "Business--Intellectual Property." Any potential dispute involving our patents or other intellectual property could include our industry partners and customers, which could trigger our indemnification obligations with them and result in substantial expense to usIn any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. This could trigger our technical support and indemnification obligations in some of our license agreements which could result in substantial expense to us. In addition to the time and expense required for us to supply such support or indemnification to our licensees, any such litigation could severely disrupt or shut down the business of our licensees, which in turn could hurt our relations with our customers and cause the sale of our proprietary technologies and software products to decrease. Defects in our proprietary technologies and software products could decrease our revenue and our competitive market shareIf our industry partners and customers discover any defects after they implement our proprietary technologies and software products, these defects could significantly decrease the market acceptance and sales of our software products, which could decrease our competitive market share. Any actual or perceived defects with our proprietary technologies and software products may also hinder our ability to attract or retain industry partners or customers, leading to a decrease in our revenue. These defects are frequently found during the period following introduction of new products or enhancements to existing products. Despite testing prior to introduction, our software products may contain software errors not discovered until after customer implementation. If our software products contain errors or defects, it could require us to expend significant resources to alleviate these problems, which could result in the diversion of technical and other resources from our other development efforts. We face operational and financial risks associated with international operationsWe derive a significant portion of our revenue from international sales. We have only limited experience in developing, marketing, selling and supporting our proprietary technologies and software products 12 internationally and may not succeed in maintaining or expanding our international operations, which could slow our revenue growth. We are subject to risks inherent in doing business in international markets. These risks include: . fluctuations in exchange rates which may negatively affect our operating results; . greater difficulty in collecting accounts receivable resulting in longer collection periods; . compliance with and unexpected changes in a wide variety of foreign laws and regulatory environments with which we are not familiar; . export controls which could prevent us from shipping our software products into and from some markets; . changes in import/export duties and quotas could affect the competitive pricing of our software products and reduce our market share in some countries; and . economic or political instabilityWe may be unable to continue to market our proprietary technologies and software products successfully in international markets. We may need to raise additional funds to support our growth or execute our strategy and if we are unable to do so, we may be unable to develop or enhance our proprietary technologies and software products, respond to competitive pressures or acquire desired businesses or technologiesWe currently anticipate that our available cash resources, combined with the net proceeds from this offering, will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. However, we may need to raise additional funds in order to: . support more rapid expansion; . develop new or enhanced products; . respond to competitive pressures; or . acquire complementary businesses or technologiesThese factors will impact our future capital requirements and the adequacy of our available funds. We may need to raise additional funds through public or private financings, strategic relationships or other arrangements. We may be unable to consummate other potential acquisitions or investments or successfully integrate them with our business, which may slow our ability to expand the range of our proprietary technologies and software productsTo expand the range of our proprietary technologies and software products, we may acquire or make investments in additional complementary businesses, technologies or products if appropriate opportunities arise. We may be unable to identify suitable acquisition or investment candidates at reasonable prices or on reasonable terms, or consummate future acquisitions or investments, each of which could slow our growth strategy. If we do acquire additional companies or make other types of acquisitions, we may have difficulty integrating the acquired products, personnel or technologies. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Management will have broad discretion as to the use of proceeds from this offering and, as a result, we may not use the proceeds to the satisfaction of our stockholdersOur board of directors and management will have broad discretion in allocating the net proceeds of this offering. They may choose to allocate such proceeds in ways that do not yield a favorable return or are not 13 supported by our stockholders. We have designated only limited specific uses for the net proceeds from this offering. Please see "Use of Proceeds." The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate mattersThe concentration of ownership of our outstanding capital stock with our directors and executive officers after this offering may limit your ability to influence corporate matters. Prior to the completion of this offering, our directors and executive officers, and their affiliates, beneficially own 67.0% of our outstanding capital stock, and we expect them to remain significant stockholders upon the completion of this offering. As a result, these stockholders, if acting together, will have the ability to control all matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any corporate transactions. We have anti-takeover defenses that could delay or prevent an acquisition of our companyProvisions of our certificate of incorporation and bylaws in effect after completion of this offering and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Please see "Description of Capital Stock." Negotiations between the underwriters and us determined the initial public offering price, but the market price may be less or may be volatile, and you may not be able to resell your shares at or above the initial public offering priceThis initial public offering price may vary from the market price of our common stock after the offering. The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, including: . actual or anticipated fluctuations in our operating results; . changes in market valuations of other technology companies; . conditions or trends in the semiconductor industry; . announcements by us or our competitors of significant technical innovations, contracts, acquisitions or partnerships; . additions or departures of key personnel; . any deviations in net revenue or in losses from levels expected by securities analysts; . volume fluctuations, which are particularly common among highly volatile securities of technology related companies; and . sales of substantial amounts of our common stock or other securities in the open marketGeneral political or economic conditions, such as recession or interest rate or currency rate fluctuations in the United States or abroad, also could cause the market price of our common stock to decline. Please see "Underwriting." Our stock price is likely to be extremely volatile as the market for technology companies' stock has recently experienced extreme price and volume fluctuationsVolatility in the market price of our common stock could result in securities class action litigation. Any litigation would likely result in substantial costs and a diversion of management's attention and resources. Despite the strong pattern of operating losses of technology companies, the market demand, valuation and trading prices of these companies have been high. At the same time, the share prices of these companies' stocks have been highly volatile and have recorded lows well below their historical highs. As a result, investors 14 in these companies often buy the stock at very high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the stock holdings of these investors. Our stock may not trade at the same levels as other technology stocks. In addition, technology stocks in general may not sustain current market prices. An active public market for our common stock may not developAn active public market for our common stock may not develop or be sustained after this offering. The initial public offering price for the shares has-0.20255730.501527.45240.9746811495623.340True2000
18.045.0NaN231.418979CONWAY20.00000.06340.9910938.82FalseNASDQFalseTrueFinanceBankingOtherNaNNaNHome BancShares Inc,Conway,AR0.155445NaNStephens Inc2145.3215.918NaN04NaN18.0NaNFalseNaN04.7507507.00107.00119.003risk factors an investment in our common stock involves risks. before making an investment decision, you should carefully consider the risks described below, together with our consolidated financial statements and the related notes and the other information included in this prospectus. the discussion below presents material risks associated with an investment in our common stock. if any of the following risks actually occur, our business, financial condition and results of operations could be harmed. in such a case, the trading price of our common stock could decline, and you may lose all or part of your investment. the risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. see cautionary noteregarding forward-looking statements. risks related to our businessour decisions regarding credit risk could be inaccurate and our allowance for loan losses may be inadequate, which would materially and adversely affect our business, financial condition, results of operations and future prospects. management makes various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of our secured loans. we maintain an allowance for loan losses that we consider adequate to absorb future losses which may occur in our loan portfolio. in determining the size of the allowance, we analyze our loan portfolio based on our historical loss experience, volume and classification of loans, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information. as of march31, 2006, our allowance for loan losses was approximately $24.4million, or 1.96% of our total loans receivable. if our assumptions are incorrect, our current allowance may be insufficient to cover future loan losses, and increased loan loss reserves may be needed to respond to different economic conditions or adverse developments in our loan portfolio. in addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs based on judgments different than those of our management. any increase in our allowance for loan losses or loan charge-offs could have a negative effect on our operating results.because we have a high concentration of loans secured by real estate, a downturn in the real estate market could result in losses and materially and adversely affect business, financial condition, results of operations and future prospects. a significant portion of our loan portfolio is dependent on real estate. as of march31, 2006, approximately 82.2% of our loans had real estate as a primary or secondary component of collateral. the real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. an adverse change in the economy affecting values of real estate generally or in our primary markets specifically could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. furthermore, it is likely that we would be required to increase our provision for loan losses. if we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our allowance for loan losses, our profitability and financial condition could be adversely impacted.because we have a concentration of exposure to a number of individual borrowers, a significant loss on any of those loans could materially and adversely affect our business, financial condition, results of operations, and future prospects. we have a concentration of exposure to a number of individual borrowers. under applicable law, each of our bank subsidiaries is generally permitted to make loans to one borrowing relationship up to 20% of their respective capital in the case of our arkansas bank subsidiaries, and 15% of capital (25% on secured loans) in the case of our florida bank subsidiary. historically, when our bank subsidiaries have lending relationships that exceed their individual loan to one borrower limitation, the overline, or amount in excess of the subsidiarybanks legal lending limit, is participated to our other bank subsidiaries. as a result, on a consolidated basis we may have aggregate exposure to individual or related borrowers in excess of each individual bank subsidiarys legal lending limit. as of march31, 2006, the aggregate legal lending limit of our bank subsidiaries for secured loans was approximately $34.4million. currently, our board of directors has established an in-house consolidated lending limit of $16.0million to any one borrowing relationship without obtaining the approval of our chairman and our vice chairman. as of march31, 2006, we had 11 borrowing relationships where we had a commitment to loan in excess of $10.0million, with the aggregate amount of those commitments totaling approximately $180.0million. the largest of those commitments to one borrowing relationship was $27.3million, which is 16.1% of our consolidated shareholders equity. given the size of these loan relationships relative to our capital levels and earnings, a significant loss on any one of these loans could materially and adversely affect our business, financial condition, results of operations, and future prospects.the unexpected loss of key officers may materially and adversely affect our business, financial condition, results of operations and future prospects. our success depends significantly on our executive officers, especially john w. allison, ron w. strother, randy e. mayor, and on the presidents of our bank subsidiaries. our bank subsidiaries, in particular, rely heavily on their management teams relationships in their local communities to generate business. because we do not have employment agreements or non-compete agreements with our employees, our executive officers and bank presidents are free to resign at any time and accept an employment offer from another company, including a competitor. the loss of services from a member of our current management team may materially and adversely affect our business, financial condition, results of operations and future prospects.our growth and expansion strategy may not be successful and our market value and profitability may suffer. growth through the acquisition of banks, de novo branching, and the organization of new banks represents an important component of our business strategy. although we have no present plans to acquire any financial institution or financial services provider, any future acquisitions we might make will be accompanied by the risks commonly encountered in acquisitions. these risks include, among other things: credit risk associated with the acquired banks loans and investments; difficulty of integrating operations and personnel;and potential disruption of our ongoing business. we expect that competition for suitable acquisition candidates may be significant. we may compete with other banks or financial service companies with similar acquisition strategies, many of which are larger and have greater financial and other resources. we cannot assure you that we will be able to successfully identify and acquire suitable acquisition targets on acceptable terms and conditions. in addition to the acquisition of existing financial institutions, we plan to continue de novo branching, and we may consider the organization of new banks in new market areas. we do not, however, have any current plans to organize a new bank. de novo branching and any acquisition or organization of a new bank carries with it numerous risks, including the following: the inability to obtain all required regulatory approvals; significant costs and anticipated operating losses associated with establishing a de novo branch or a new bank; the inability to secure the services of qualified senior management; the local market may not accept the services of a new bank owned and managed by a bank holding company headquartered outside of the market area of the new bank; the inability to obtain attractive locations within a new market at a reasonable cost;and the additional strain on management resources and internal systems and controls. we cannot assure that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions, de novo branching and the organization of new banks. our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value and profitability. we expect to continue to grow our assets and deposits, the products and services we offer, and the scale of our operations, generally, both internally and through acquisitions. if we continue to grow rapidly, we may not be able to control costs and maintain our asset quality. our ability to manage our growth successfully will depend on our ability to maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms. if we grow too quickly and are not able to control costs and maintain asset quality, this rapid growth could materially and adversely affect our financial performance.there may be undiscovered risks or losses associated with our acquisitions of bank subsidiaries which would have a negative impact upon our future income. our growth strategy includes strategic acquisitions of bank subsidiaries. we acquired three bank subsidiaries in 2005, and will continue to consider strategic acquisitions, with a primary focus on arkansas and southwestern florida. in most cases, our acquisition of a bank includes the acquisition of all of the target banks assets and liabilities, including its loan portfolio. there may be instances when we, under our normal operating procedures, may find after the acquisition that there may be additional losses or undisclosed liabilities with respect to the assets and liabilities of the target bank, and, with respect to its loan portfolio, that the ability of a borrower to repay a loan may have become impaired, the quality of the value of the collateral securing a loan may fall below our standards, or the allowance for loan losses may not be adequate. one or more of these factors might cause us to have additional losses or liabilities, additional loan charge-offs, or increases in allowances for loan losses, which would have a negative impact upon our future income.an economic downturn, natural disaster or act of terrorism, especially one affecting our market areas, could adversely affect our business, financial condition, results of operations and future prospects. our business is affected by prevailing economic conditions in the united states, including inflation and unemployment rates, but is particularly subject to the local economies in arkansas, the florida keys and southwestern florida. our relatively small size and our geographic concentration expose us to greater risk of unfavorable local economic conditions than the larger national or regional banks in our market areas. adverse changes in local economic factors, such as population growth trends, income levels, deposits and housing starts, may adversely affect our operations. we are at risk of natural disaster or acts of terrorism, even if our market areas are not primarily affected. our florida market, in particular, is subject to risks from hurricanes, which may damage or dislocate our facilities, damage or destroy collateral, adversely affect the livelihood of borrowers or otherwise cause significant economic dislocation in areas we serve. if and when economic conditions deteriorate, either in our local market areas or nationwide, we may experience a reduction in the demand for our products and services and deterioration in the quality of our loan portfolio and consequently have a material and adverse effect on our business, financial condition, results of operations and future prospects.competition from other financial institutions may adversely affect our profitability. the banking business is highly competitive. we experience strong competition, not only from commercial banks, savings and loan associations, and credit unions, but also from mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions operating in or near our market areas. we compete with these institutions both in attracting deposits and in making loans.many of our competitors are much larger national and regional financial institutions. we may face a competitive disadvantage against them as a result of our smaller size and resources and our lack of geographic diversification. we also compete against community banks that have strong local ties. these smaller institutions are likely to cater to the same small and mid-sized businesses that we target and to use a relationship-based approach similar to ours. in addition, our competitors may seek to gain market share by pricing below the current market rates for loans and paying higher rates for deposits. competitive pressures can adversely affect our profitability.our recent results do not indicate our future results, and may not provide guidance to assess the risk of an investment in our common stock. we are unlikely to sustain our historical rate of growth, and may not even be able to expand our business at all. further, our recent growth may distort some of our historical financial ratios and statistics. in the future, we may not have the benefit of several recently favorable factors, such as a strong residential housing market or the ability to find suitable expansion opportunities. various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. if we are not able to successfully grow our business, our financial condition and results of operations could be adversely affected.we may not be able to raise the additional capital we need to grow and, as a result, our ability to expand our operations could be materially impaired. federal and state regulatory authorities require us and our bank subsidiaries to maintain adequate levels of capital to support our operations. while we believe that our capital will be sufficient to support our current operations and anticipated expansion, factors such as faster than anticipated growth, reduced earning levels, operating losses, changes in economic conditions, revisions in regulatory requirements, or additional acquisition opportunities may lead us to seek additional capital. our ability to raise additional capital, if needed, will depend on our financial performance and on conditions in the capital markets at that time, which are outside our control. if we need additional capital but cannot raise it on terms acceptable to us, our ability to expand our operations could be materially impaired.we are considered by the federal reserve board to be a source of financial strength for white river bancshares and may be required to support its capital. we hold a 20% ownership interest in white river bancshares, inc., a bank holding company headquartered in fayetteville, arkansas. our minority ownership means that we lack effective power to control the operations of the holding company. we are, nevertheless, considered by the federal reserve board to be a source of financial strength for that holding company. as a result, we may be required to contribute sufficient funds for white river bancshares to meet regulatory capital requirements if it is unable to raise funds from other sources. an obligation to support white river bancshares may be required at times when, in the absence of this federal reserve board policy, we might not be inclined to provide it. as of and for the year ended december31, 2005, white river bancshares had total assets of $184.7million, total shareholders equity of $51.2million, and a net operating loss of $2.7million. the capital ratios for white river bancshares wholly-owned bank subsidiary, signature bank of arkansas, at year-end and the minimum ratios required to be considered well capitalized were: leverage ratio, 24.7% (5.0% required); tier1 capital ratio, 27.8% (6.0% required); and total risk-based capital ratio, 29.0% (10.0% required). we may be unable to, or choose not to, pay dividends on our common stock. although we have paid a quarterly dividend on our common stock since the second quarter of 2003 and expect to continue this practice, we cannot assure you of our ability to continue. our ability to pay dividends depends on the following factors, among others: we may not have sufficient earnings since our primary source of income, the payment of dividends to us by our bank subsidiaries, is subject to federal and state laws that limit the ability of these banks to pay dividends. federal reserve board policy requires bank holding companies to pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organizations expected future needs and financial condition. before dividends may be paid on our common stock in any year, dividends of $0.25per share must first be paid on our classa preferred stock and $0.57per share on our classb preferred stock. before dividends may be paid on our common stock in any year, payments must be made on our subordinated debentures. our board of directors may determine that, even though funds are available for dividend payments, retaining the funds for internal uses, such as expansion of our operations, is a better strategy. if we fail to pay dividends, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment.our directors and executive officers own a significant portion of our common stock and can exert significant control over our business and corporate affairs. our directors and executive officers, as a group, will beneficially own approximately 38.6% of our common stock immediately following this offering. consequently, if they vote their shares in concert, they can significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors. the interests of our officers and directors may conflict with the interests of other holders of our common stock, and they may take actions affecting our company with which you disagree.the holders of our subordinated debentures have rights that are senior to those of our shareholders. we have $44.8million of subordinated debentures issued in connection with trust preferred securities. payments of the principal and interest on the trust preferred securities are unconditionally guaranteed by us. the subordinated debentures are senior to our shares of common stock. as a result, we must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of our common stock. we have the right to defer distributions on the subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of our common stock. risks related to our industryour profitability is vulnerable to interest rate fluctuations and monetary policy. most of our assets and liabilities are monetary in nature, and thus subject us to significant risks from changes in interest rates. consequently, our results of operations can be significantly affected by changes in interest rates and our ability to manage interest rate risk. changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationship between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest paid on interest-bearing liabilities. this difference could result in an increase in interest expense relative to interest income or a decrease in interest rate spread. in addition to affecting our profitability, changes in interest rates can impact the valuation of our assets and liabilities.as of march31, 2006, our one-year ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities was 104.1% and our cumulative gap position was 2.3% of total earning assets, resulting in a minimum impact on earnings for various interest rate change scenarios. floating rate loans made up 39.1% of our $1.2billion loan portfolio. in addition, 70.7% of our loans receivable and 81.3% of our time deposits were scheduled to reprice within 12months and our other rate sensitive asset and rate sensitive liabilities composition is subject to change. significant composition changes in our rate sensitive assets or liabilities could result in a more unbalanced position and interest rate changes would have more of an impact to our earnings. our results of operations are also affected by the monetary policies of the federal reserve board. actions by the federal reserve board involving monetary policies could have an adverse effect on our deposit levels, loan demand or business and earnings.we are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability. we are a registered financial holding company primarily regulated by the federal reserve board. our bank subsidiaries are also primarily regulated by the federal reserve board, the federal deposit insurance corporation, and the arkansas state bank department or florida office of financial regulation. complying with banking industry regulations is costly and may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. we are also subject to capital requirements by our regulators. violations of various laws, even if unintentional, may result in significant fines or other penalties, including restrictions on branching or bank acquisitions. recently, banks generally have faced increased regulatory sanctions and scrutiny, particularly under the usa patriot act and statutes that promote customer privacy or seek to prevent money laundering. as regulation of the banking industry continues to evolve, we expect the costs of compliance to continue to increase and, thus, to affect our ability to operate profitably. upon completion of this offering, we will become subject to the many requirements of the securities exchange act of 1934, the sarbanes-oxley act of 2002, and the related rules and regulations promulgated by the securities and exchange commission and nasdaq. these laws and regulations will increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices. although we are accustomed to conducting business in a highly regulated environment, these laws and regulations have different requirements for compliance than we have previously experienced. our expenses for accounting, legal and consulting services will increase because of the new obligations we will face as a public company. in addition, the sudden application of these requirements to our business will result in some cultural adjustments and may strain our management resources. to date, we have not conducted a comprehensive review and confirmation of the adequacy of our existing systems and controls as will be required under section404 of the sarbanes-oxley act, and will not do so until after the completion of this offering. we may discover deficiencies in existing systems and controls. if that is the case, we intend to take the necessary steps to correct any deficiencies. these steps may be costly and strain our resources. a decline in the market price for our common stock may result if we are unable to comply with the sarbanes-oxley act. risks related to this offeringwe have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment. we will use the net proceeds of this offering for general corporate purposes, which may include, among other things, our working capital needs and providing investments in our bank subsidiaries. we may also use the net proceeds to finance bank acquisitions, though we have no present plans in that regard. thus, ourmanagement has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. we may not invest the proceeds of this offering effectively or in a manner that yields a favorable (or any) return on our common stock, and consequently, this could result in financial losses that could have a material adverse effect on our business or cause the price of our common stock to decline.there has been no prior active trading market for our common stock. we cannot assure you that an active public trading market will develop after the offering and, even if it does, our stock price may trade below the public offering price. there has been no public market for our common stock prior to this offering. an active trading market for our common stock may never develop or be sustained, which could affect your ability to sell your shares. even if a market develops for our common stock after the offering, the market price of our common stock may experience significant volatility. factors that may affect the price of our common stock include the depth and liquidity of the market for our common stock, investor perception of our financial strength, conditions in the banking industry such as credit quality and monetary policies, and general economic and market conditions. our quarterly operating results, changes in analysts earnings estimates, changes in general conditions in the economy or financial markets or other developments affecting us could cause the market price of our common stock to fluctuate substantially. in addition, the initial public offering price has been determined through negotiations between us and the underwriters, and may bear no relationship to the price at which the common stock will trade upon completion of the offering.investors in this offering will experience immediate and substantial dilution. purchasers in this offering will experience immediate dilution to the extent of the difference between the initial public offering price and the net tangible book value per share of our common stock. this dilution is estimated to be $8.36 per share, based on the initial offering price of $18.00 per share and our pro forma net tangible book value of $9.64per share as of march31, 2006. this per-share dilution takes into account the conversion to common stock of our outstanding shares of classa preferred stock and classb preferred stock, as it is our intent to effect those conversions as soon as practicable after the offering is completed. to the extent we raise additional capital by issuing equity securities in the future, our shareholders may experience additional dilution. our board of directors may determine, from time to time, a need to obtain additional capital through the issuance of additional shares of common stock or other securities. we may issue additional securities at prices or on terms less favorable than or equal to the public offering price and terms of this offering.the ability of our insiders or the holders of our classa and classb preferred stock to sell substantial amounts of common stock after this offering may depress the market price of our common stock or cause it to decline. there are three potentially significant sources of shares of our common stock that may come on the market after this offering: our directors and executive officers will beneficially own approximately 38.6% of our common stock immediately after this offering. although they are subject to lock-up agreements with our underwriters, which generally prevent them from selling their shares within 180days after the offering, the underwriters may release them from those obligations. in any event, after the lock-up agreements expire, approximately 6.7million additional shares of our common stock could become tradable by our directors and executive officers. we intend to require that all of the outstanding shares of our classa preferred stock be converted to common stock as soon as practicable after june6, 2006, the first date on which we can require conversion of those shares. we also intend, as soon as practicable after this offering, to require that our classb preferred stock be converted to common stock. conversion of our classa preferred stock and classb preferred stock will result in approximately 2,159,921shares of our common stock being issued. approximately 80,720additional shares of our common stock may be issued upon exercise of outstanding preferred stock options and the subsequent conversion to common stock of the preferred shares issued. most of the holders of the newly issued shares of common stock will be eligible immediately to sell their shares. we intend to register all common stock that we may issue upon exercise of outstanding options under our 2006 stock option and performance incentive plan. once we register these shares, they can be sold in the public market upon issuance, subject to restrictions under the securities laws and, if applicable, the lock-up agreements described above. as of march31, 2006, stock options to purchase968,244shares of our common stock had been granted under this plan, of which 481,224 are presently exercisable. sales of a significant number of shares of our common stock after this offering, or the expectation that these sales may occur, could depress the market price of our common stock.0.00726617.091257.932190.64845000000142.890False2006
29.0247.1NaN452.480993BOISE26.15000.09464.2613712.21FalseNYSEFalseTrueOtherConstruction MaterialsOther615284.0247058826.0Boise Cascade Co0.2731543750588.0Bank of America Merrill Lynch\nGoldman Sachs & Co\nDeutsche Bank Securities Inc\nJP Morgan & Co Inc\nWells Fargo Securities LLC3143.18116.93615.07783.021.0NaNTrue615284.003.6255008.75109.00129.004risk factors investing in our common stock involves a high degree of risk. you should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. any of the following risks could materially and adversely affect our business, financial condition and results of operations. in such case, you may lose all or part of your original investment. risks relating to our businessmany of the products we manufacture or purchase and resell are commodities whose price is determined by the market's supply and demand for such products, and the markets in which we operate are cyclical and competitive. the depressed state of the housing, construction and home improvement markets could continue to adversely affect demand and pricing for our products. many of the building products we produce or distribute, including osb, plywood, lumber and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently in an auction market, based on participants' perceptions of short-term supply and demand factors. at times, the price for any one or more of the products we produce may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our manufacturing facilities. therefore, our profitability with respect to these commodity products depends, in significant part, on managing our cost structure, particularly raw materials and labor, which represent the largest components of our operating costs. commodity wood product prices could be volatile in response to operating rates and inventory levels in various distribution channels. commodity price volatility affects our distribution business, with falling price environments generally causing reduced revenues and margins, resulting in substantial declines in profitability and possible net losses. historically, demand for the products we manufacture, as well as the products we purchase and distribute, has been closely correlated with new residential construction in the united states and, to a lesser extent, light commercial construction and residential repair and remodeling activity. new residential construction activity remained substantially below average historical levels during 2012 and so did demand for many of the products we manufacture and distribute. there is significant uncertainty regarding the timing and extent of any recovery in such construction activity and resulting product demand levels. demand for new residential construction is influenced by seasonal weather factors, mortgage availability and rates, unemployment levels, household formation rates, domestic population growth, immigration rates, residential vacancy and foreclosure rates, demand for second homes, existing home prices, consumer confidence and other general economic factors. wood products industry supply is influenced primarily by price-induced changes in the operating rates of existing facilities but is also influenced over time by the introduction of new product technologies, capacity additions and closures, restart of idled capacity and log availability. the balance of wood products supply and demand in the united states is also heavily influenced by imported products, principally from canada. we have very limited control of the foregoing, and as a result, our profitability and cash flow may fluctuate materially in response to changes in the supply and demand balance for our primary products.our industry is highly competitive. if we are unable to compete effectively, our sales, operating results and growth strategies could be negatively affected. the markets for the products we manufacture in our wood products segment are highly competitive. our competitors range from very large, fully integrated forest and building products firms to smaller firms that may manufacture only one or a few types of products. we also compete less directly with firms that manufacture substitutes for wood building products. certain mills operated by our competitors may be lower-cost manufacturers than the mills operated by us. the building products distribution industry that our building materials distribution segment competes in is highly fragmented and competitive, and the barriers to entry for local competitors are relatively low. competitive factors in our industry include pricing and availability of product, service and delivery capabilities, ability to assist customers with problem solving, customer relationships, geographic coverage and breadth of product offerings. also, financial stability is important to suppliers and customers in choosing distributors and allows for more favorable terms on which to obtain products from suppliers and sell products to customers. if our financial condition deteriorates in the future, our support from suppliers may be negatively affected. some of our competitors are larger companies and, therefore, have access to greater financial and other resources than we do. these resources may afford those competitors greater purchasing power, increased financial flexibility and more capital resources for expansion and improvement, which may enable those competitors to compete more effectively than we can.our manufacturing businesses may have difficulty obtaining wood fiber at favorable prices or at all. wood fiber is our principal raw material, which accounted for approximately 43% of the aggregate amount of materials, labor and other operating expenses (excluding depreciation), for our wood products segment in 2012. wood fiber is a commodity and prices have been cyclical historically in response to changes in domestic and foreign demand and supply. foreign demand for timber exports, particularly from china, increased timber costs in the western u.s. in 2010 and 2011 and negatively affected wood products manufacturers in the region. in 2012, china's demand for timber exports from the western u.s. declined from 2011 levels, but in the future we expect that the level of foreign demand for timber exports from the western u.s. will continue to fluctuate based on the economic activity in china and other pacific rim countries, currency exchange rates and the availability of timber supplies from other countries such as canada, russia and new zealand. sustained periods of high timber costs may impair the cost competitiveness of our manufacturing facilities. we currently enjoy the benefit of supply agreements put in place in 2005 following the sale of our timberlands (or successor arrangements), under which we purchase timber at market based prices. for 2012, approximately 33% of our timber was supplied pursuant to agreements assumed by (or replacement master supply agreements with) hancock natural resource group,inc. ("hancock"), the molpus woodlands groupllc ("molpus") and rayonier louisiana timberlands,llc, a timberland real estate investment trust ("rayonier"). the supply agreements with these parties terminate on december31, 2014, subject to additional one-year extensions unless notice is provided to the other party at least six months prior to expiration of the applicable agreement. if a counterparty to these agreements elects not to continue these agreements or we are unable to renegotiate these agreements on terms that are acceptable to us, we would need to locate a replacement supplier for our timber requirements, which could include private purchases with other suppliers, open-market purchases and purchases from governmental sources. if we are unable to locate a replacement supplier in a particular region to satisfy our timber needs at satisfactory prices, it could have an adverse effect on our results of operations. in 2012, we purchased approximately 21% of our timber from federal, state and local governments. in certain regions in which we operate, a substantial portion of our timber is purchased from governmental authorities. as a result, existing and future governmental regulation can affect our access to, and the cost of, such timber. future domestic or foreign legislation and litigation concerning the use of timberlands, timber harvest methodologies, forest road construction and maintenance, the protection of endangered species, forest-based carbon sequestration, the promotion of forest health and the response to and prevention of catastrophic wildfires can affect timber and fiber supply from both government and private lands. availability of harvested timber and fiber may be further limited by fire, insect infestation, disease, ice storms, windstorms, hurricanes, flooding and other natural and man-made causes, thereby reducing supply and increasing prices. availability of residual wood fiber for our particleboard operation has been negatively affected by significant mill closures and curtailments that have occurred among solid-wood product manufacturers. future development of wood cellulose biofuel or other new sources of wood fiber demand could interfere with our ability to source wood fiber or lead to significantly higher costs.significant changes in discount rates, actual investment return on pension assets and other factors could affect our earnings, equity and pension contributions in future periods. our earnings may be negatively affected by the amount of income or expense we record for our pension plans. gaap requires that we calculate income or expense for the plans using actuarial valuations. these valuations reflect assumptions relating to financial market and other economic conditions. changes in key economic indicators can change the assumptions. the most significant year-end assumptions used to estimate pension expense are the discount rate and the expected long-term rate of return on plan assets. in addition, we are required to make an annual measurement of plan assets and liabilities, which may result in a significant change to equity through a reduction or increase to "accumulated other comprehensive loss." a decline in the market value of the pension assets will increase our funding requirements. our pension plan liabilities are sensitive to changes in interest rates. as interest rates decrease, the liabilities increase, potentially increasing benefit costs and funding requirements. changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions, may also increase the funding requirements of the obligations related to the pension plans. at december31, 2012, the net underfunded status of our defined benefit pension plans was $192.5million. if the status of our defined benefit plans continues to be underfunded, we anticipate significant future funding obligations, reducing the cash available for our business. for more discussion regarding how our financial statements can be affected by pension plan estimates, see "management's discussion and analysis of financial condition and results of operationscritical accounting estimatespensions."our recent significant capital investments have increased fixed costs, which could negatively affect our profitability. in the past three years, we have completed a number of capital investments, including significantly increasing our outdoor storage acreage and leasing additional warehouse space. in the future, we expect to make further capital investments, primarily related to internal veneer production. these significant capital investments have resulted in increased fixed costs, which could negatively affect our profitability if the housing market does not recover and revenues do not improve to offset our incremental fixed costs.a material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, including the demand from our building materials distribution business, reduce our sales, and/or negatively affect our financial results. any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including but not limited to: equipment failure, particularly a press at one of our major ewp production facilities; fires, floods, earthquakes, hurricanes or other catastrophes; unscheduled maintenance outages; utility and transportation infrastructure disruptions; labor difficulties; other operational problems; or ecoterrorism or threats of ecoterrorism. any downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. if our machines or facilities were to incur significant downtime, our ability to satisfy customer requirements would be impaired, resulting in lower sales and net income. because approximately 39% of our wood products sales in the ltm period, including approximately 73% of our ewp sales, were to our building materials distribution business, a material disruption at our wood products facilities would also negatively impact our building materials distribution business. we are therefore exposed to a larger extent to the risk of disruption to our wood products manufacturing facilities due to our vertical integration and the resulting impact on our building materials distribution business. in addition, a number of our suppliers are subject to the manufacturing facility disruption risks noted above. our suppliers' inability to produce the necessary raw materials for our manufacturing processes or supply the finished goods that we distribute through our building materials distribution segment may adversely affect our results of operations, cash flows and financial position.adverse conditions may increase the credit risk from our customers. our building materials distribution and wood products segments extend credit to numerous customers who are heavily exposed to the effects of downturns in the housing market. unfavorable housing market conditions could result in financial failures of one or more of our significant customers, which could impair our ability to fully collect receivables from such customers and negatively affect our operating results, cash flow and liquidity.a significant portion of our sales are concentrated with a relatively small number of customers. for the year ended december31, 2012, our top ten customers represented approximately 29% of our sales, with one customer accounting for approximately 11% of sales. at december31, 2012 and june30, 2013, receivables from such customer accounted for approximately 14% and 16%, respectively, of total receivables. although we believe that our relationships with our customers are strong, the loss of one or more of these customers could have a material adverse effect on our operating results, cash flow and liquidity.our ability to service our indebtedness or to fund our other liquidity needs is subject to various risks. our ability to make scheduled payments on our indebtedness and fund other liquidity needs depends on and is subject to our financial and operating performance, which in turn is affected by general and regional economic, financial, competitive, business and other factors, including the availability of financing in the banking and capital markets as well as the other risks described herein. in particular, demand for our products correlates to a significant degree to the level of residential construction activity in north america, which historically has been characterized by significant cyclicality. over the last several years, housing starts remained below historical levels. this reduced level of building was caused, in part, by an increase in the inventory of homes for sale, a more restrictive mortgage market, and a slowed economy. there can be no assurance as to when or if the housing market will rebound to historical levels. we have experienced significant losses from operations and used significant cash for operating activities in recent periods. we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. if we are unable to service our debt obligations or to fund our other liquidity needs, we could be forced to curtail our operations, reorganize our capital structure, or liquidate some or all of our assets.we are subject to environmental regulation and environmental compliance expenditures, as well as other potential environmental liabilities. our businesses are subject to a wide range of general and industry-specific environmental laws and regulations, particularly with respect to air emissions, wastewater discharges, solid and hazardous waste management and site remediation. enactment of new environmental laws or regulations, including those aimed at addressing greenhouse gas emissions, or changes in existing laws or regulations might require significant expenditures or restrict operations. from time to time, legislative bodies and environmental regulatory agencies may promulgate new regulatory programs imposing significant incremental operating costs or capital costs on us. in december 2012, the u.s. environmental protection agency (the "epa") finalized a revised series of four regulations commonly referred to collectively as boiler mact, which are intended to regulate the emission of hazardous air pollutants from industrial boilers. facilities in our wood products segment will be subject to one or more of these regulations and must be in compliance with the applicable rules by early 2016. we are currently undertaking a complete review of the revised rules to assess how they will affect our operations. even with the revised rules finalized, considerable uncertainty still exists, as there will likely be legal challenges to the final rules from industry and/or environmental organizations. notwithstanding that uncertainty, we are proceeding with efforts to analyze the applicability and requirements of the regulations, including the capital and operating costs required to comply. at this time, we cannot accurately forecast the capital or operating cost changes that may result from compliance with the regulations. as an owner and operator of real estate, we may be liable under environmental laws for the cleanup of past and present spills and releases of hazardous or toxic substances on or from our properties and operations. we could be found liable under these laws whether or not we knew of, or were responsible for, the presence of such substances. in some cases, this liability may exceed the value of the property itself. we may be unable to generate funds or other sources of liquidity and capital to fund unforeseen environmental liabilities or expenditures to the extent we are not indemnified by third parties. for example, in connection with the completion of our acquisition of the forest products and paper assets of officemax in 2004 (the "forest products acquisition"), officemax is generally obligated to indemnify us for hazardous substance releases and other environmental violations that occurred prior to the forest products acquisition. however, officemax may not have sufficient funds to fully satisfy its indemnification obligations when required, and in some cases, we may not be contractually entitled to indemnification by officemax. in addition, in connection with the sale of our paper and packaging& newsprint assets in 2008, boiseinc. and its affiliates assumed any and all environmental liabilities arising from our ownership or operation of the assets and businesses sold to them, and we believe we are entitled to indemnification by them from third-party claims in the event they fail to fully discharge any such liabilities on the basis of common law rules of indemnification. however, boiseinc. may not have sufficient funds to discharge its obligations when required or to indemnify us from third-party claims arising out of any such failure. for additional information on how environmental regulation and compliance affects our business, see "management's discussion and analysis of financial condition and results of operationsenvironmental." labor disruptions or increased labor costs could adversely affect our business. as of october13, 2013, we had approximately 5,210 employees. approximately 27% of these employees work pursuant to collective bargaining agreements. as of october13, 2013, we had nine collective bargaining agreements. two agreements, covering 375 employees at our facility in florien, louisiana, and 283 employees at our facility in oakdale, louisiana, expired on july15, 2013 but have been indefinitely extended by the parties, subject to either party submitting a ten-day written notice to terminate. we expect these two agreements to be negotiated together. if these agreements are not renewed or extended upon their expiration, we could experience a material labor disruption or significantly increased labor costs, which could prevent us from meeting customer demand or reduce our sales and profitability.if our long-lived assets become impaired, we may be required to record noncash impairment charges that could have a material impact on our results of operations. we review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. should the markets for our products deteriorate further or should we decide to invest capital differently than as expected, or should other cash flow assumptions change, it is possible that we will be required to record noncash impairment charges in the future with respect to the investments we have completed and expect to complete, which could have a material impact on our results of operations.the terms of our revolving credit facility and the indenture governing our senior notes restrict, and covenants contained in agreements governing indebtedness in the future may restrict, our ability to operate our business and to pursue our business strategies. our revolving credit facility and the indenture governing our senior notes contain, and any future indebtedness of ours may contain, a number of restrictive covenants that impose customary operating and financial restrictions on us. our revolving credit facility and the indenture governing our senior notes limit our ability and the ability of our restricted subsidiaries, among other things, to: incur additional debt; declare or pay dividends, redeem stock, or make other distributions to stockholders; make investments; create liens or use assets as security in other transactions; merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; enter into transactions with affiliates; sell or transfer certain assets; and make prepayments on our senior notes and subordinated indebtedness. in addition, our revolving credit facility provides that if an event of default occurs or excess availability under our revolving credit facility drops below a threshold amount equal to the greater of 10% of the aggregate commitments under our revolving credit facility or $35million (and until such time as excess availability for two consecutive fiscal months exceeds that threshold amount and no event of default has occurred and is continuing), we will be required to maintain a monthly minimum fixed coverage charge ratio of 1.0:1.0, determined on a trailing twelve-month basis. our failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness. we may be unable to attract and retain key management and other key employees. our key managers are important to our success and may be difficult to replace because they have an average of 30years of experience in forest products manufacturing and building materials distribution. while our senior management team has considerable experience, certain members of our management team are nearing or have reached normal retirement age. the failure to successfully implement succession plans could result in inadequate depth of institutional knowledge or inadequate skill sets, which could adversely affect our business.our growth strategy includes pursuing strategic acquisitions. we may be unable to integrate efficiently acquired operations or complete successfully potential acquisitions. we may not be able to integrate the operations of acquired businesses, including chester wood productsllc and moncure plywoodllc, in an efficient and cost-effective manner or without significant disruption to our existing operations or realize expected synergies. acquisitions involve significant risks and uncertainties, including uncertainties as to the future financial performance of the acquired business, difficulties integrating acquired personnel into our business, the potential loss of key employees, customers or suppliers, difficulties in integrating different computer and accounting systems, exposure to unknown or unforeseen liabilities of acquired companies, and the diversion of management attention and resources from existing operations. in the future, we may be unable to complete successfully potential acquisitions due to multiple factors, such as issues related to regulatory review of the proposed transactions. we may also be required to incur additional debt in order to consummate acquisitions, which debt may be substantial and may limit our flexibility in using our cash flow from operations. our failure to integrate future acquired businesses effectively or to manage other consequences of our acquisitions could adversely affect our financial condition, operating results and cash flows.we rely on boiseinc. for many of our administrative services. in conjunction with the sale of our paper and packaging& newsprint assets in 2008, we entered into an outsourcing services agreement, under which boiseinc. provides a number of corporate staff services to us. these services include information technology, accounting and human resource transactional services. most of the boiseinc. staff that provides these services are providing the same services they provided when they were our employees. on october25, 2013, packaging corporation of america ("pca") acquired all of the outstanding common shares of boiseinc. the outsourcing services agreement remains in place after pca's acquisition of boiseinc. and is currently set to expire on february22, 2015. we cannot be assured that the staff providing such services will remain with pca after the acquisition, or that there will not be a disruption in the continuity or level of service provided. if pca is unwilling or unable to provide services at the same quality levels as those services have been provided in the past, or we are unable to develop and implement effective alternatives, if necessary, our business and compliance activities and results of operations could be substantially and negatively affected. risks relating to ownership of our common stockthe price of our common stock may fluctuate significantly, and you could lose all or part of your investment. volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. the market price for our common stock could fluctuate significantly for various reasons, including: our operating and financial performance and prospects; our quarterly or annual earnings or those of other companies in our industry; the public's reaction to our press releases, our other public announcements and our filings with the sec; changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry; the failure of research analysts to cover our common stock; general economic, industry and market conditions; strategic actions by us, our customers or our competitors, such as acquisitions or restructurings; new laws or regulations or new interpretations of existing laws or regulations applicable to our business; changes in accounting standards, policies, guidance, interpretations or principles; material litigation or government investigations; changes in general conditions in the u.s. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events; changes in key personnel; sales of common stock by us, our principal stockholder or members of our management team; termination of lock-up agreements with our management team and principal stockholder; the granting or exercise of employee stock options; volume of trading in our common stock; and the impact of the facts described elsewhere in "risk factors." in addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. this volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. the changes frequently appear to occur without regard to the operating performance of the affected companies. hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our share price.the requirements of being a public company have increased certain of our costs and require significant management focus. we completed our initial public offering in february 2013 and boise cascade common stock is listed on the nyse. as a public company, our legal, accounting and other expenses associated with compliance-related and other activities have increased. for example, in connection with our initial public offering, we created new board committees and appointed an additional independent director to comply with the corporate governance requirements of the nyse. costs to obtain director and officer liability insurance contribute to our increased costs. as a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs. until certain applicable phase-in periods expire, we are exempt from certain corporate governance requirements since we were a "controlled company" within the meaning of the nyse rules and, as a result, you will not have the protections afforded by these corporate governance requirements. until july30, 2013, when bc holdings ceased to hold a majority of our common stock, we were considered a "controlled company" for the purposes of the nyse listing requirements. under these rules, a company of which more than 50% of the voting power is held by a group is a "controlled company" and may elect not to comply with certain nyse corporate governance requirements, including the requirements that our board of directors, our compensation committee and our corporate governance and nominating committee meet the standard of independence established by those corporate governance requirements. we have one year from the date we ceased to be a controlled company to fully comply with all of nyse's corporate governance requirements. accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the nyse's corporate governance requirements until the applicable phase-in periods expire.our significant stockholder, bc holdings, has the ability to influence corporate activities and its interests may not coincide with yours. after the consummation of this offering, bc holdings will beneficially own approximately 22.4% of our outstanding common stock, assuming the underwriters do not exercise their option to purchase additional shares. if the underwriters exercise in full their option to purchase additional shares, bc holdings will beneficially own approximately 19.8% of our outstanding common stock. as a result of its ownership, bc holdings (and madison dearborn as its indirect controlling equityholder) has the ability to influence the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to influence decision-making with respect to our business direction and policies. matters over which bc holdings, directly or indirectly, has the ability to influence decision-making include: election of directors; mergers and other business combination transactions, including proposed transact0.10590227.211492.561104.1862470588263273.496False2013
36.036.02000.048.110260SANTA CLARA13.81250.43497.3210727.18FalseNASDQTrueFalseBusiness Equipment -- Computers, Software, and Electronic EquipmentElectronic EquipmentBusiness Equipment, Telephone and Television Transmission18682.026640000.0Latitude Communications Inc0.017135377400.0CS First Boston Corp2561.617.37214.03116.012.00.000000False18682.007.4098189.00109.00181.508RISK FACTORS You should carefully consider the following risks in addition to the remainder of this prospectus before purchasing our common stock. The risks and uncertainties described below are intended to highlight risks that are specific to us and are not the only ones that we face. Additional risks and uncertainties, such as those that generally apply to business enterprises in our industry, also may impair our business operations. Our future profitability is uncertain due to our limited operating historyWe have a limited operating history and cannot assure you that our revenue will continue to grow or that we will maintain profitability in the future. Our prospects must be considered in light of the risks and uncertainties encountered by companies in the early stages of development. We rely substantially on sales of our MeetingPlace products, which have limited market acceptanceIn addition, we are unable to predict our future product development, sales and marketing, and administrative expenses. To the extent that these expenses increase, we will need to increase revenue to sustain profitability. Our ability to increase revenue and sustain profitability also depends on the other risk factors described in this section. Our operating results may fluctuate significantlyOur operating results are difficult to predict. Our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors. If this occurs, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following: . changes in our mix of revenues generated from product sales and services; . changes by existing customers in their levels of purchases of our products and services; . changes in our mix of sales channels through which our products and services are sold; and . changes in our mix of domestic and international salesOrders at the beginning of each quarter typically do not equal expected revenue for that quarter. In addition, a significant portion of our orders are received in the last month of each fiscal quarter. If we fail to ship products by the end of a quarter in which the order is received, or if our prospective customers delay their orders or delivery schedules until the following quarter, we may fail to meet our revenue objectives. 6 Our market is highly competitiveBecause of intense market competition, we may not be successful. Currently, our principal competitors include: . major telecommunications carriers that operate service bureaus for voice conferencing, such as AT&T Corp., MCI Worldcom, Inc. and Sprint Corporation; . private branch exchange, or PBX, vendors that sell systems with voice conferencing capabilities, such as Lucent Technologies Inc. and Nortel Networks; . providers of video conferencing systems such as PictureTel Corporation, Pinnacle Systems, Inc. and 8x8, Inc.; and . smaller start-up companies that offer web-based voice and data conferencing productsMany of these companies have longer operating histories, stronger brand names and significantly greater financial, technical, marketing and other resources than we do. These companies also may have existing relationships with many of our prospective customers. In addition, these companies may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirementsIn addition, we expect competition to persist and intensify in the future which could adversely affect our ability to increase sales, penetrate new markets and maintain average selling prices. In the future, we may experience competition from potential competitors that include: . networking companies, such as Cisco Systems, Inc., 3Com Corporation, Lucent Technologies Inc. and Nortel Networks that are focusing on enabling the transmission of voice over the Internet and that may offer voice and data conferencing functionality; and . collaborative software providers, such as Microsoft Corporation and Lotus Development Corporation, that are focusing on data conferencing products and that may in the future incorporate voice conferencing functionality into their products. Our market is in an early stage of development, and our products may not be adoptedIf the market for our integrated voice and data conferencing products fails to grow or grows more slowly than we anticipate, we may not be able to increase revenues or remain profitable. The market for integrated real-time voice and data conferencing is relatively new and rapidly evolving. Our ability to remain profitable depends in large part on the widespread adoption by end users of real-time voice and data conferencingWe will have to devote substantial resources to educate prospective customers about the uses and benefits of our products. In addition, businesses that have invested substantial resources in other conferencing products may be reluctant or slow to adopt our products, which might replace or compete with their existing systems. Our efforts to educate potential customers may not result in our products achieving market acceptance. 7 Rapid technological changes could cause our products to become obsolete or require us to redesign our productsThe market in which we compete is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and emerging industry standards. In particular, we expect that the growth of the Internet and Internet-based telephony applications, as well as general technology trends such as migrations to new operating systems, will require us to adapt our product to remain competitive. This adaptation could be costly and time-consuming. Our products could become obsolete and unmarketable if products using new technologies are introduced and new industry standards emerge. For example, the widespread acceptance of competing technologies, such as video conferencing and the transmission of voice over the Internet, could diminish demand for our current products. As a result, the life cycle of our products is difficult to estimateTo be successful, we will need to develop and introduce new products and product enhancements that respond to technological changes or evolving industry standards, such as the transmission of voice over the Internet, in a timely manner and on a cost effective basis. In addition, our current full care support agreements with our customers require us to deliver two product upgrades per year. We cannot assure you that we will successfully develop these types of products and product enhancements or that our products will achieve broad market acceptance. Our sales cycle is lengthy and unpredictableAny delay in sales of our products could cause our quarterly revenue and operating results to fluctuate. The typical sales cycle of our products is lengthy, generally between six to nine months, unpredictable, and involves significant investment decisions by prospective customers, as well as our education of potential customers regarding the use and benefits of our products. Furthermore, many of our prospective customers have neither budgeted expenses for voice and data conferencing systems nor have personnel specifically dedicated to procurement and implementation of these conferencing systems. As a result, our customers spend a substantial amount of time before purchasing our products in performing internal reviews and obtaining capital expenditure approvals. We cannot be certain that this cycle will not lengthen in the future. The emerging and evolving nature of the real-time voice and data conferencing market may lead to confusion in the market, which may cause prospective customers to postpone their purchase decisions. In addition, general concerns regarding Year 2000 compliance may further delay purchase decisions by prospective customers. If we fail to expand our sales and distribution channels, our business could sufferIf we are unable to expand our sales and distribution channels, we may not be able to increase revenue or achieve market acceptance of our MeetingPlace product. We have recently expanded our direct sales force and plan to recruit additional sales personnel. New sales personnel will require training and take time to achieve full productivity, and there is strong competition for qualified sales personnel in our business. In addition, we believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. To date, we have entered into agreements with only a small number of these distribution partners. We cannot be certain that 8 we will be able to reach agreement with additional distribution partners on a timely basis or at all, or that these distribution partners will devote adequate resources to selling our products. Furthermore, if our distribution partners fail to adequately market or support our products, the reputation of our products in the market may suffer. In addition, we will need to manage potential conflicts between our direct sales force and third-party reselling efforts. Our ability to expand into international markets is uncertainWe intend to continue to expand our operations into new international markets. In addition to general risks associated with international expansion, such as foreign currency fluctuations and political and economic instability, we face the following risks and uncertainties any of which could prevent us from selling our products in a particular country or harm our business operations once we have established operations in that country: . the difficulties and costs of localizing products for foreign markets, including the development of multilingual capabilities in our MeetingPlace system; . the need to modify our products to comply with local telecommunications certification requirements in each country; and . our lack of a direct sales presence in other countries, our need to establish relationships with distribution partners to sell our products in these markets and our reliance on the capabilities and performance of these distribution partners. If we fail to integrate our products with third-party technology, our sales could sufferOur products are designed to integrate with our customers' data and voice networks, as well as with enterprise applications such as browsers and collaborative software applications. If we are unable to integrate our products with these networks and systems, sales of our products could suffer In addition, we may be required to engage in costly and time-consuming redesigns of our products because of technology enhancements or upgrades of these systems. We may not be able to redesign our products or be certain that any of these redesigns will achieve market acceptance. In addition, we will need to continually modify our products as newer versions of the enterprise applications with which our products integrate are introduced. Our ability to do so largely depends on our ability to gain access to the advanced programming interfaces for these applications, and we cannot assure you that we will have access to necessary advanced programming interfaces in the future. We may experience difficulties managing our expected growthOur recent growth has strained, and we expect that any future growth will continue to strain, our management systems and resources, which could hinder our ability to continue to grow in the future. We may also experience difficulties meeting the demand for our products and services. If we are unable to provide training and support for our products, the implementation process will be longer and customer satisfaction may be lowerWe may not be able to install management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be 9 adequate to support our future operations. Competition for qualified personnel in the San Francisco Bay area, as well as other markets in which we recruit, is extremely intense and characterized by rapidly increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates. Our business could suffer if we lose the services of our current management teamOur future success depends on the ability of our management to operate effectively, both individually and as a group. If we were to lose the services of any of these key employees we may encounter difficulties finding qualified personnel to replace them In addition, three of our seven executive officers joined us during the past 12 months. Accordingly, our executive officers' ability to function effectively as a management team remains unproven. The loss of our right to use technology licensed to us by third parties could harm our businessWe license technology that is incorporated into our products from third parties, including digital signal processing algorithms and the MeetingPlace server's operating system and relational database. Any interruption in the supply or support of any licensed software could disrupt our operations and delay our sales, unless and until we can replace the functionality provided by this licensed software. Because our products incorporate software developed and maintained by third parties, we depend on these third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. Any interruption in supply of components from outside manufacturers and suppliers could hinder our ability to ship products in a timely mannerWe rely on third parties to obtain most of the components of the MeetingPlace server and integrate them with other standard components, such as the central processing unit and disk drives. If these third parties are no longer able to supply and assemble these components or are unable to do so in a timely manner, we may experience delays in shipping our products and have to invest resources in finding an alternative manufacturer or manufacture our products internallyIn addition, we obtain key hardware components, including the processors and digital signal processing devices used in the MeetingPlace server, from sole source suppliers. In the past, we have experienced problems in obtaining some of these components in a timely manner from these sources, and we cannot be certain that we will be able to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components or to locate alternative sources of supply, we may experience delays in shipping our products and incur additional costs to find an alternative manufacturer or manufacture our products internally. Our products may suffer from defects, errors or breaches of securitySoftware and hardware products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Any errors or defects 10 that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our customer relationships or reputation or increased service and warranty cost. Our products may not be free from errors or defects after commercial shipments have begun, and we are aware of instances in which some of our customers have experienced product failures or errorsMany of our customers conduct confidential conferences, and transmit confidential data, using MeetingPlace. Concerns over the security of information sent over the Internet and the privacy of its users may inhibit the market acceptance of our products. In addition, unauthorized users in the past have gained, and in the future may be able to gain, access to our customers' MeetingPlace systems. Any compromise of security could deter people from using MeetingPlace and could harm our reputation and business and result in claims against us. We may be unable to adequately protect our proprietary rights, and we may be subject to infringement claimsUnauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary, which could cause our business to suffer. Furthermore, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States In the future, we may be subject to legal proceedings and claims for alleged infringement of third party proprietary rights. Any of these claims, even if not meritorious, could result in costly litigation, divert management's attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. Parties making these claims may be able to obtain injunctive or other equitable relief, which could prevent us from selling our productsDell Computer Corporation has registered the "Latitude" mark for computers in the United States and in other countries. Dell's United States trademark registration and Canadian application have blocked our ability to register the "Latitude Communications" and "Latitude" with logo marks in the United States and the "Latitude Communications" mark in Canada. Since we believe that we have priority of trade name usage in the United States, we have petitioned to cancel Dell's United States registration and opposed its Canadian application. The outcome of these proceedings is uncertain. If Dell's registration for the "Latitude" mark is not canceled or if we are unable to obtain consent from Dell for our registration of our marks, we may not be able to register our marks and would have to rely solely on common law protection for these marks. We cannot assure you that we will be free from challenges of or obstacles to our use or registration of our marks. We are subject to government regulation, and our failure to comply with these regulations could harm our businessOur products are subject to a wide variety of safety, emissions and compatibility regulations imposed by governmental authorities in the United States or in other countries in which we sell our products. If we are unable to obtain necessary approvals or maintain compliance with the regulations of any particular jurisdiction, we may be prohibited from selling our products in that territory. In addition, to sell our products in many international markets, we are required to obtain certifications that are specific to the local telephony infrastructure. 11 We may be subject to claims related to Year 2000 issues, and Year 2000 concerns could adversely affect our revenuesMany currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries, including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. Year 2000 compliance efforts may involve significant time and expense, and uncorrected problems could materially adversely affect our business, financial condition and operating results. We may face claims based on Year 2000 issues arising from the integration of multiple products within an overall system. We may also experience reduced sales of our products as potential customers reduce their budgets for voice and data conferencing products due to increased expenditures on their own Year 2000 compliance efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure." Our stock price may be volatileWe expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to: . announcements of technological or competitive developments; . acquisitions or strategic alliances by us or our competitors; or . the gain or loss by us of significant orders. Our executive officers and directors and their affiliates own a large percentage of our voting stock and could control the voting power of the common stockOn completion of this offering, executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately 58% of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, deter or prevent transactions that would result in the change of control, which in turn could reduce the market price of our common stock. Future sales of our common stock may depress our stock priceAfter this offering, we will have outstanding 18,581,657 shares of common stock. Sales of a substantial number of shares of common stock in the public market following this offering could materially adversely affect the market price of our common stock. All the shares sold in this offering will be freely tradable. Upon the expiration of arrangements between our stockholders and Latitude or the underwriters in which our stockholders have agreed not to sell or dispose of their Latitude common stock, all of the remaining 15,581,657 shares of common stock outstanding after this offering will be eligible for sale in the public market 180 days following the date of this prospectus. Of these shares, 11,682,572 shares will be subject to volume limitations under federal securities laws. 12 If our stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall. See "Shares Eligible for Future Sale" and "Underwriting." This prospectus contains forward-looking statements that involve risks and uncertaintiesWe have made forward-looking statements under the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." These statements involve risks and uncertainties that may cause our business or financial results to materially differ from those expressed by the forward-looking statements We have identified forward-looking statements by using terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminologyWe are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. 130.12275615.861358.8260.0542664000033.042True1999
4NaN50.0NaN80.601321WATERTOWN18.1500-0.818NaN17640.17TrueNASDQTrueTrueHealthcare, Medical Equipment, and DrugsPharmaceutical ProductsHealthcare, Medical Equipment, and Drugs114399.850000000.0Syros Pharmaceuticals Inc0.002420NaNCowen & Co\nPiper Jaffray Cos\nJMP Securities LLC4834.93-47.74317.00414.012.50.588391False114399.813.6255007.25107.50114.502risk factors investing in our common stock involves a high degree of risk. before you decide to invest in our common stock, you should carefully consider the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. if any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects could be harmed. in these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. risks related to our financial position and need for additional capitalwe have incurred significant losses since inception, expect to incur significant and increasing losses for at least the next several years, and may never achieve or maintain profitability. we have incurred significant annual net operating losses in every year since our inception. we expect to continue to incur significant and increasing net operating losses for at least the next several years. our net losses were $13.4million and $29.8million for the years ended december31, 2014 and 2015, respectively, and $10.6million for the three months ended march31, 2016. as of march31, 2016, we had an accumulated deficit of $64.1million. we have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. we have financed our operations to date primarily through private placements of our preferred stock. we have devoted substantially all of our financial resources and efforts to research and development and general and administrative expense to support such research and development. our net losses may fluctuate significantly from quarter to quarter and year to year. net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders' (deficit) equity and working capital. we anticipate that our expenses will increase substantially if and as we: continue to develop and begin clinical trials with respect to sy-1425, including a phase2 clinical trial we expect to initiate in mid-2016; continue to develop sy-1365, including initiating a phase 1/2 clinical trial in the first half of 2017; initiate and continue research, preclinical and clinical development efforts for our preclinical programs; further develop our gene control platform; seek to identify and develop additional product candidates; acquire or in-license other product candidates or technologies; seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any; establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any; require the manufacture of larger quantities of product candidates for clinical development and, potentially, commercialization; maintain, expand and protect our intellectual property portfolio; hire and retain additional personnel, such as clinical, quality control and scientific personnel; add operational, financial and management information systems and personnel, including personnel to support our product development and help us comply with our obligations as a public company; and add equipment and physical infrastructure to support our research and development programs. our ability to become and remain profitable depends on our ability to generate revenue. we do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. successful commercialization will require achievement of key milestones, including initiating and successfully completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues, and if or when we might achieve profitability. we and any future collaborators may never succeed in these activities and, even if we do, or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations and cause a decline in the value of our common stock.we have a limited operating history, no products approved for sale and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability. we commenced operations in 2011. our operations to date have been limited to financing and staffing our company, developing our gene control platform and conducting preclinical research. we have not yet demonstrated an ability to successfully conduct clinical trials, obtain marketing approvals, manufacture a commercial-scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical stage biopharmaceutical companies such as ours. any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products. we may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. we will eventually need to transition from a company with a development focus to a company capable of supporting commercial activities. we may not be successful in such a transition. we expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.we will need substantial additional funding, and if we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts. developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time consuming, expensive and uncertain process that takes years to complete. we expect our expenses to increase in connection with our ongoing activities, particularly as we initiate clinical trials of sy-1425, advance the development of sy-1365, initiate new research and preclinical development efforts and seek marketing approval for any product candidates that we successfully develop. moreover, under license agreements with various licensors, we are obligated to make milestone payments upon the successful completion of specified development and commercialization activities. in addition, if we obtain marketing approval for any product candidate that we may successfully develop, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. furthermore, following the closing of this offering, we expect to incur significant additional costs associated with operating as a public company. accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. if we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. we plan to use the net proceeds of this offering primarily to fund our ongoing research and development efforts. we will be required to expend significant funds in order to advance the development of sy-1425 and sy-1365, as well as our other preclinical programs. in addition, while we may seek one or more collaborators for future development of our current product candidate or any future product candidates that we may develop for one or more indications, we may not be able to enter into a collaboration for any of our product candidates for such indications on suitable terms, on a timely basis or at all. in any event, the net proceeds of this offering and our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of our product candidates or our other preclinical programs. accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. we do not have any committed external source of funds. adequate additional financing may not be available to us on acceptable terms, or at all. our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. we believe that the net proceeds from this offering, together with our existing cash and cash equivalents as of march31, 2016, will enable us to fund our operating expenses and capital expenditure requirements at least through mid-2018. our estimate as to how long we expect the net proceeds from this offering, together with our existing cash and cash equivalents, to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. our future funding requirements, both short-term and long-term, will depend on many factors, including: the scope, progress, timing, costs and results of clinical trials of sy-1425 and sy-1365; research and preclinical development efforts for any future product candidates that we may develop; our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements; the number of future product candidates that we pursue and their development requirements; the outcome, timing and costs of seeking regulatory approvals; the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities; the costs of acquiring potential new product candidates or technology; the costs of any physician education programs relating to selecting and treating genomically defined patient populations; the timing and amount of milestone and other payments due to licensors for patent and technology rights used in our development platform; revenue received from commercial sales, if any, of our current and future product candidates; our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure; the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and the costs of operating as a public company.raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates. we expect our expenses to increase in connection with our planned operations. to the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, your ownership interest may be diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. in addition, debt financing, if available, would result in fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. in addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management's ability to oversee the development of our product candidates. if we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. if we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. risks related to the discovery, development and commercialization of product candidatesour approach to the discovery and development of product candidates based on our gene control platform is novel and unproven, and we do not know whether we will be able to develop any products of commercial value. we are focused on discovering and developing medicines for the treatment of cancer and other diseases based upon our gene control platform. we are leveraging our platform to create a pipeline of gene control drug candidates for genomically defined patients whose diseases have not been adequately addressed to date by other genomics approaches and to design and conduct efficient clinical trials with a higher likelihood of success. while we believe that applying our gene control platform to create medicines for genomically defined patient populations may potentially enable drug research and clinical development that is more efficient than conventional small molecule drug research and development, our approach is both novel and unproven. because our approach is both novel and unproven, the cost and time needed to develop our product candidates is difficult to predict, and our efforts may not result in the discovery and development of commercially viable medicines. we may also be incorrect about the effects of our product candidates on the diseases of genomically defined patient populations, which may limit the utility of our approach or the perception of the utility of our approach. furthermore, our estimates of genomically defined patient populations available for study and treatment may be lower than expected, which could adversely affect our ability to conduct clinical trials and may also adversely affect the size of any market for medicines we may successfully commercialize. we have not yet succeeded and may never succeed in demonstrating efficacy and safety for our current or any future product candidates in clinical trials or in obtaining marketing approval thereafter. for example, although we have discovered and evaluated compounds using our novel gene control platform, we have not yet advanced a compound into any phase of clinical development.our gene control platform may fail to help us discover and develop additional potential product candidates. a significant portion of the research that we are conducting involves identifying novel targets and points of intervention and developing new compounds using our gene control platform. the drug discovery that we are conducting using our gene control platform may not be successful in identifying compounds that have commercial value or therapeutic utility. our gene control platform may initially show promise in identifying potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization for a number of reasons, including: compounds created through our gene control platform may not demonstrate efficacy, safety or tolerability; potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to receive marketing approval and achieve market acceptance; competitors may develop alternative therapies that render our potential product candidates non-competitive or less attractive; or a potential product candidate may not be capable of being produced at an acceptable cost. our research programs to identify new product candidates will require substantial technical, financial and human resources, and we may be unsuccessful in our efforts to identify new product candidates. if we are unable to identify suitable additional compounds for preclinical and clinical development, our ability to develop product candidates and obtain product revenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact our stock price.in the near term, we are dependent on the success of sy-1425 and sy-1365. if we are unable to initiate or complete the clinical development of, obtain marketing approval for or successfully commercialize sy-1425 or sy-1365, either alone or with a collaborator, or if we experience significant delays in doing so, our business could be substantially harmed. we currently have no products approved for sale and are investing a significant portion of our efforts and financial resources in the development of sy-1425 and sy-1365. our prospects are substantially dependent on our ability, or that of any future collaborator, to develop, obtain marketing approval for and successfully commercialize product candidates in one or more disease indications. the success of sy-1425 and sy-1365 will depend on several factors, including the following: initiation and successful enrollment and completion of clinical trials; a safety, tolerability and efficacy profile that is satisfactory to the u.s. food and drug administration, or fda, or any comparable foreign regulatory authority for marketing approval; timely receipt of marketing approvals from applicable regulatory authorities; the performance of our future collaborators, if any; the extent of any required post-marketing approval commitments to applicable regulatory authorities; establishment of supply arrangements with third-party raw materials suppliers and manufacturers including with respect to the supply of active pharmaceutical ingredient for sy-1425; establishment of arrangements with third-party manufacturers to obtain finished drug product that is appropriately packaged for sale; adequate ongoing availability of raw materials and drug product for clinical development and any commercial sales; obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the united states and internationally, including our ability to maintain our license agreement with tmrc, which we refer to as the tmrc license agreement; protection of our rights in our intellectual property portfolio; successful launch of commercial sales following any marketing approval; a continued acceptable safety profile following any marketing approval; commercial acceptance by patients, the medical community and third-party payors; successful identification of biomarkers for patient selection; continued availability of appropriate tissue samples to enable the identification of novel targets in genomically defined subsets of patients; and our ability to compete with other therapies. many of these factors are beyond our control, including clinical development, the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborator. if we are unable to develop, receive marketing approval for and successfully commercialize sy-1425 or sy-1365, on our own or with any future collaborator, or experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.if clinical trials of any future product candidates that we, or any future collaborators, may develop fail to satisfactorily demonstrate safety and efficacy to the fda and other regulators, we, or any future collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates. we, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the united states without obtaining marketing approval from the fda. foreign regulatory authorities, such as the european medicines agency, or the ema, impose similar requirements. we, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we will be able to obtain these approvals. clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. we cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. the clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of product development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the fda or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. for example, a phase2 clinical trial of tamibarotene (sy-1425) for the treatment of late-stage non-small cell lung cancer, or nsclc, under a previous license between tmrc and a third party was terminated when interim data suggested that the primary endpoint of progression-free survival for 18months after starting therapy would not be reached. interim data also showed that tamibarotene combined with paclitaxel and carboplatin chemotherapy was associated with increased toxicity in this non-selected nsclc patient population. although we have no current plans to conduct studies of sy-1425 in nsclc or combine tamibarotene with paclitaxel and carboplatin in late-stage nsclc patients, we face a similar risk of failure in our planned clinical trials of sy-1425. it is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case. any inability to successfully complete preclinical and clinical development could result in additional costs to us, or any future collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. moreover, if we, or any future collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we or they contemplate, if we, or they, are unable to successfully complete clinical trials of our product candidates or other testing, or the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or there are unacceptable safety concerns associated with our product candidates, we, or any future collaborators, may: incur additional unplanned costs; be delayed in obtaining marketing approval for our product candidates; not obtain marketing approval at all; obtain approval for indications or patient populations that are not as broad as intended or desired; obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings; be subject to additional post-marketing testing or other requirements; or be required to remove the product from the market after obtaining marketing approval. our failure to successfully initiate and complete clinical trials of our product candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our product candidates would significantly harm our business.adverse events or undesirable side effects caused by, or other unexpected properties of, product candidates that we develop may be identified during development and could delay or prevent their marketing approval or limit their use. adverse events or undesirable side effects caused by, or other unexpected properties of, sy-1425, sy-1365 or any future product candidates that we may develop could cause us, any future collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the fda or comparable foreign regulatory authorities. because gene control techniques are relatively new, side effects from gene control approaches may be unpredictable. tamibarotene has been observed to be associated with adverse events, such as mild or moderate dry skin, skin rash, headache and bone pain, as well as retinoic acid syndrome and elevated levels of cholesterol, lipids, liver function enzymes and white blood cells, which were severe in certain cases. furthermore, retinoids such as sy-1425 may cause birth defects and therefore may carry a warning on their label. other examples of retinoids, a class of chemical compounds that are related to vitamin a, include all trans retinoic acid or atra, retin-a, retinol (found in over-the-counter skin creams), isotretinoin and bexarotene. we have not yet tested sy-1365 in humans so the safety profile that sy-1365 will demonstrate in human clinical trials is unknown. if any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.if we, or any future collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our current product candidate or any future product candidates that we, or any future collaborators, may develop, potential clinical development, marketing approval or commercialization of our product candidates could be delayed or prevented. we, or any future collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent clinical development, marketing approval or commercialization of our current product candidate or any future product candidates that we, or any future collaborators, may develop, including: regulators or institutional review boards may not authorize us, any future collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; we, or any future collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites; clinical trials of our product candidates may produce unfavorable or inconclusive results; we, or any future collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs; the number of patients required for clinical trials of our product candidates may be larger than we, or any future collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or any future collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any future collaborators, anticipate; our estimates of the genomically defined patient populations available for study may be higher than actual patient numbers and result in our inability to sufficiently enroll our trials; the cost of planned clinical trials of our product candidates may be greater than we anticipate; our third-party contractors or those of any future collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any future collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or any future collaborators in a timely manner or at all; patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial's duration; we, or any future collaborators, may have to delay, suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate; regulators or institutional review boards may require that we, or any future collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar product or product candidate; the fda or comparable foreign regulatory authorities may disagree with our, or any future collaborators', clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials; the fda or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we, or any future collaborators, enter into agreements for clinical and commercial supplies; the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supp-0.52279317.122071.5091.323500000000.317True2016
59.0116.35000.091.253925SAN JOSE14.00000.70835.0514988.55TrueNYSEFalseTrueOtherConstructionOtherNaNNaNUCP Inc0.115779NaNCiti\nDeutsche Bank Securities Inc\nZelman Partners LLC3443.67-1.941NaN04NaN15.0NaNFalseNaN02.1252508.50108.5018.501risk factors an investment in our classa common stock involves a high degree of risk and should be considered highly speculative. before making an investment decision, you should carefully consider the following risk factors, which we believe address the material risks concerning our business and an investment in our classa common stock, together with the other information contained in this prospectus. if any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our classa common stock could decline significantly and you could lose all or a part of your investment. some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. please refer to the section entitled cautionary note concerning forward-looking statements. risks related to our business the homebuilding and land development industry in the united states has recently undergone a significant downturn, and the likelihood of a continued recovery is uncertain in the current state of the economy. the homebuilding and land development industry experienced substantial losses in connection with the recent downturn in the u.s.housing market and, in particular, in the northern california housing market. although the housing markets in the u.s. and northern california markets have begun to recover, we cannot predict whether and to what extent this recovery will continue or its timing. while some of the many negative factors that contributed to the housing downturn may have moderated in 2012, several remain, and they could return and/or intensify to inhibit any future improvement in housing market conditions. these negative factors include but are not limited to (a)weak general economic and employment growth that, among other things, restrains consumer incomes, consumer confidence and demand for homes; (b)elevated levels of mortgage loan delinquencies, defaults and foreclosures that could add to a shadow inventory of lender-owned homes that may be sold in competition with new and other resale homes at low distressed prices or that generate short sales activity at such price levels; (c)a significant number of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home, which undermines their ability to purchase another home that they otherwise might desire and be able to afford; (d)volatility and uncertainty in domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various regions around the world; and (e)tight lending standards and practices for mortgage loans that limit consumers ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, more conservative appraisals, higher loan-to-value ratios and extensive buyer income and asset documentation requirements. additional headwinds may come from the efforts and proposals of lawmakers to reduce the debt of the federal government through tax increases and/or spending cuts, and financial markets and businesses reactions to those efforts and proposals, which could impair economic growth. given these factors, there can be no guarantee that we will be successful in implementing our business plan or continue to operate profitably.our long-term growth depends, in part, upon our ability to successfully identify and acquire desirable land parcels for residential buildout, which may become limited due to a variety of factors. our future growth depends, in part, upon our ability to successfully identify and acquire attractive land parcels for development of single-family homes at reasonable prices, either by ourselves, through benchmark communities, or by our third-party homebuilder customers. our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. if the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow could be significantly limited, and our revenue and gross margin could decline. to the extent that we are unable to purchase land parcels or enter into new contracts or options for the purchase of land parcels at reasonable prices, our revenue and results of operations could be negatively impacted. our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us. the residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability and cost of financing for acquisitions, construction and mortgages, interest rate levels, inflation and demand for housing. the health of the residential homebuilding industry may also be significantly affected by shadow inventory levels during recessionary and recovery periods. shadow inventory refers to the number of homes with mortgages that are in some form of distress but that have not yet been listed for sale. shadow inventory can occur when lenders put properties that have been foreclosed or forfeited to lenders on the market gradually, rather than all at once, or delay the foreclosure process. a significant shadow inventory in our markets could, were it to be released, adversely impact home and land prices and demand for our homes and land, which would have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. in addition, an important segment of our end-purchaser and customer base consists of first-time and second-time move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. the difficulties facing these buyers in selling their homes during recessionary periods may adversely affect our sales. moreover, during such periods, we may need to reduce our sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.our long-term growth depends, in part, upon our ability to acquire undeveloped land suitable for residential homebuilding at reasonable prices. the availability of partially finished developed lots and undeveloped land for purchase at reasonable prices depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers, inflation in land prices, zoning, allowable housing density, the ability to obtain building permits and other regulatory requirements. should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact us. as competition for suitable land increases, the cost of acquiring partially finished developed lots and undeveloped lots and the cost of developing owned land could rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. the availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to increase the number of actively selling communities, grow our revenue and margins, and achieve or maintain profitability. additionally, developing undeveloped land is capital intensive and time consuming. it is possible that we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.because of the seasonal nature of our business our quarterly operating results fluctuate. as discussed under managements discussion and analysis of financial condition and results of operationsseasonality, we have experienced seasonal fluctuations in our quarterly operating results and capital requirements that can have a material impact on our results and our consolidated financial statements. we typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. since it typically takes four to six months to construct a new home, we deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. we expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry. we expect the traditional seasonality cycle and its impact on our results to become more prominent if and as the present housing recovery progresses and the homebuilding industry returns to a more normal operating environment, but we can make no assurances as to the degree to which our historical 24 seasonal patterns will occur in 2013 and beyond, if at all. this seasonality requires us to finance our construction activities significantly in advance of the receipt of sales proceeds. accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. if, due to market conditions, construction delays or other causes, we do not complete home sales at anticipated pricing levels or within anticipated time frames, our liquidity, financial condition and results of operations would be adversely affected.if the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs. the market value of our land and housing inventories depends on market conditions. we acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. there is an inherent risk that the value of the land owned by us may decline after purchase. the valuation of property is inherently subjective and based on the individual characteristics of each property. we may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. in addition, our deposits for lots controlled under purchase, option or similar contracts may be put at risk. factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainty. moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. if housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we sell and build houses. in 2011, housing market conditions adversely impacted the anticipated timing and amount of sales at certain of our projects. we revised our expectations for the cash flows from these projects and evaluated whether each projects expected cash flows exceeded its carrying value. as of december31, 2011, after examining market data relating to two of our projects located in outlying areas of fresno, california, we concluded that our expected future cash flows from these projects (which can be very difficult to project, particularly estimated land development and off-site infrastructure costs in the absence of approved entitlements) would not exceed their carrying values. accordingly, we measured the fair values of these projects using discounted cash flow models and recorded a non-cash impairment charge of $5.2 million in cost of sales-land development for the year ended december31, 2011. we regularly review the value of our land holdings and continue to review our holdings on a periodic basis. further material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.the estimates, forecasts and projections relating to our markets prepared by jbrec are based upon numerous assumptions and may not prove to be accurate. this prospectus contains estimates, forecasts and projections relating to our markets that were prepared for us for use in connection with this offering by jbrec, an independent research provider and consulting firm focused on the housing industry. see market opportunity. the estimates, forecasts and projections relate to, among other things, employment, demographics, household income, home sales prices and affordability. no assurance can be given that these estimates are, or that the forecasts and projections will prove to be, accurate. these estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of jbrec. no assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by jbrec. the application of alternative assumptions, judgments or methodologies could result in materially less favorable 25 estimates, forecasts and projections than those contained in this prospectus. other real estate experts have different views regarding these forecasts and projections that may be more positive or negative, including in terms of the timing, magnitude and direction of future changes. the forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. jbrec has made these forecasts and projections based on studying the historical and current performance of the residential housing market and applying jbrecs qualitative knowledge about the residential housing market. the future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, and governmental policies related to mortgage regulations and interest rates. there will usually be differences between projected and actual outcomes, because events and circumstances frequently do not occur as expected, and the differences may be material. accordingly, the forecasts and projections included in this prospectus might not occur or might occur to a different extent or at a different time. for the foregoing reasons, neither we nor jbrec can provide any assurance that the estimates, forecasts and projections contained in this prospectus are accurate, actual outcomes may vary significantly from those contained or implied by the forecasts and projections, and you should not place undue reliance on these estimates, forecasts and projections. except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or jbrecs expectations.the homebuilding industry is highly competitive and if our competitors are more successful or offer better value to our customers our business could decline. we operate in a very competitive environment which is characterized by competition from a number of other homebuilders and land developers in each market in which we operate. additionally, there are relatively low barriers to entry into our business. we compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, home buyers, desirable land parcels, financing, raw materials and skilled management and labor resources. our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives and reduce our prices. an oversupply of homes available for sale or discounting of home prices could adversely affect pricing for homes in the markets in which we operate. oversupply and price discounting have periodically adversely affected certain markets, and it is possible that our markets will be adversely affected by these factors in the future. we also compete with the resale, or previously owned, home market which has increased significantly due to the large number of homes that have been foreclosed on or could be foreclosed on due to the recent economic downturn. if we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected. we may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. we compete directly with a number of large national and regional homebuilders, many of which have longer operating histories and greater financial and operational resources than we do. many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. this may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. this competition could reduce our market share and limit our ability to expand our business as we have planned. if home buyers are not able to obtain suitable mortgage financing, due to more stringent lending standards, rising interest rates, changes in regulation, reduced investor demand for mortgage loans and mortgage backed securities, changes in the relationship between fannie mae and freddie mac and the federal government or other reasons, our results of operations may decline. a substantial majority of home buyers finance their home purchases through lenders that provide mortgage financing. the availability of mortgage financing remains constrained, due in part to lower mortgage valuations on properties, various regulatory changes and lower risk appetite by lenders, with many lenders requiring increased levels of financial qualification, lending at lower multiples of income and requiring larger down payments. first-time home buyers are generally more affected by the availability of mortgage financing than other potential home buyers. these buyers are a key source of demand for new homes. a limited availability of home mortgage financing may adversely affect the volume of our home and land sales and the sales prices we achieve. additionally, housing demand is adversely affected by reduced availability of mortgage financing and factors that increase the upfront or monthly cost of financing a home, such as increases in interest rates, insurance premiums or limitations on mortgage interest deductibility. the recent decrease in the willingness and ability of lenders to make home mortgage loans, the tightening of lending standards and the reduction in the types of financing products available, have made it more difficult for home buyers to obtain acceptable financing. any substantial increase in mortgage interest rates or unavailability of mortgage financing may adversely affect the ability of prospective first-time and move-up home buyers to obtain financing for our homes, as well as adversely affect the ability of prospective move-up home buyers to sell their current homes. the housing industry is benefiting from the current low interest rate environment, which has allowed many home buyers to obtain mortgage financing with relatively low interest rates as compared to long-term historical averages. while the timing of any increase in interest rates is uncertain, it is widely expected that interest rates will increase, and any such increase will make mortgage financing more expensive and adversely affect the ability of home buyers to purchase our homes. the recent disruptions in the credit markets and the curtailed availability of mortgage financing has adversely affected, and is expected to continue to adversely affect, our business, prospects, liquidity, financial condition, results of operations and cash flows as compared to prior periods. beginning in 2008, the mortgage lending industry has experienced significant instability, beginning with increased defaults on sub-prime loans and other nonconforming loans and compounded by expectations of increasing interest payment requirements and further defaults. this in turn resulted in a decline in the market value of many mortgage loans and related securities. lenders, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in recent years. credit requirements have tightened, and investor demand for mortgage loans and mortgage-backed securities has declined. the deterioration in credit quality during the recent economic downturn caused almost all lenders to stop offering sub-prime mortgages and most other loan products that were not eligible for sale to fannie mae or freddie mac or loans that did not meet fha and veterans administration requirements. fewer loan products, tighter loan qualifications and a reduced willingness of lenders to make loans may continue to make it more difficult for certain buyers to finance the purchase of our homes. these factors may reduce the pool of qualified home buyers and make it more difficult to sell to first-time and move-up buyers who have historically made up a substantial part of our homebuilding customers. reductions in demand adversely affected our business and financial results during the downturn, and the duration and severity of some of their effects remain uncertain. the liquidity provided by fannie mae and freddie mac to the mortgage industry has been very important to the housing market. these entities have required substantial injections of capital from the federal government and may require additional government support in the future. several federal government officials have proposed changing the nature of the relationship between fannie mae and freddie mac and the federal government and even nationalizing or eliminating these entities entirely. if fannie mae and freddie mac were dissolved or if the federal government determined to stop providing liquidity support to the mortgage market, there would be a reduction in the availability of the financing provided by these institutions. any such reduction would likely have an adverse effect on interest rates, mortgage availability and our sales of new homes. if home buyers are not able to obtain fha financing due to further tightening of borrower eligibility and future restrictions imposed by lenders on fha financing, our results of operations may decline. the fha insures mortgage loans that generally have lower down payment requirements and qualification standards compared to conventional guidelines, and as a result, continue to be a particularly important source for financing the sale of our homes. in recent years, lenders have taken a more conservative view of fha guidelines causing significant tightening of borrower eligibility for approval. in the near future, further restrictions are expected on fha-insured loans, including limitations on seller-paid closing costs and concessions. this or any other restriction may negatively affect the availability or affordability of fha financing, which could adversely affect our ability to sell homes. in addition, changes in federal regulatory and fiscal policies aimed at aiding the home buying market (including a repeal of the home mortgage interest tax deduction) may also negatively affect potential home buyers ability to purchase homes.if suitable mortgage financing is not available to home buyers generally, our home buyers may not be able to sell their existing homes in order to buy a new home from us, which would adversely affect our results of operations. in each of our markets, decreases in the availability of credit and increases in the cost of credit adversely affect the ability of home buyers to obtain or service mortgage debt. even if potential home buyers do not themselves need mortgage financing, where potential home buyers must sell their existing homes in order to buy a new home, increases in mortgage costs, lack of availability of mortgages and/or regulatory changes could prevent the buyers of potential home buyers existing homes from obtaining a mortgage, which would result in our potential customers inability to buy a new home from us. similar risks apply to those buyers who are awaiting delivery of their homes and are currently in backlog. our success depends, in part, on the ability of potential home buyers to obtain mortgages for the purchase of homes. if our customers (or potential buyers of our customers existing homes) cannot obtain suitable financing, our sales and results of operations could be adversely affected.new lending requirements pursuant to the dodd-frank wall street reform and consumer protection act could reduce the availability and increase the cost of mortgage financing, which could adversely affect out results of operations. in july 2010, the dodd-frank wall street reform and consumer protection act was signed into law. this legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices, many of which are to be developed further by implementing rules. these include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and remedies for borrowers in foreclosure proceedings. the effect of such provisions on lending institutions will depend on the rules that are ultimately enacted. however, these requirements, as and when implemented, are expected to reduce the availability of loans to borrowers and/or increase the costs to borrowers to obtain such loans. any such reduction could result in a decline of our home and land sales, which could materially and adversely affect us.our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline. our business strategy is focused on the acquisition of suitable land and the design, construction and sale of single-family homes in residential subdivisions, including planned communities, in northern california and washington state. in california, we principally operate in the central valley area, the monterey bay area and the south san francisco bay area; in washington state, we operate in the puget sound area. because our operations are concentrated in these areas, a prolonged economic downturn in one or more of these areas, particularly within california, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. from 2007 to 2009, land values, the demand for new homes and home prices declined 28 substantially in california. in addition, the state of california has experienced severe budget shortfalls in recent years and has raised taxes and certain fees to offset the deficit. if these conditions in california persist or worsen, it would have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. if buyer demand for new homes in california or washington state decreases, home prices could stagnate or decline, which would have a material adverse effect on us.any limitation on, or reduction or elimination of, tax benefits associated with owning a home would have an adverse effect upon the demand for land and homes for residential development, which could be material to our business. changes in federal income tax laws may affect demand for new homes and land suitable for residential development. current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individuals federal, and in many cases, state, taxable income. various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. for instance, under the american taxpayer relief act of 2012, which was signed into law in january 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain high-income individuals and households. if the federal government or a state government changes or further changes its income tax laws, as some lawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits, without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential customers. enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease the demand for new homes and land suitable for residential development.difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects. the homebuilding and land development industry is capital-intensive and requires significant up front expenditures to acquire land parcels and begin development. in addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. if internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. the availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. the credit and capital markets have recently experienced significant volatility. if we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. if we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for development or to develop housing. additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase or option contracts, we may incur contractual penalties and fees. any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.we face potentially substantial risk with respect to our land and lot inventory. we intend to acquire land parcels for re-0.007261100.001615.41267.32011625000092.726False2013
641.0150.0NaN161.103523FAIRPORT12.0000NaN175.4912044.47FalseNYSEFalseTrueFinanceTradingOtherNaNNaNManning & Napier IncNaN1625000.0Bank of America Merrill Lynch2697.97-27.167NaN07NaN12.0NaNFalseNaN02.7147140.00000.00019.003risk factors investing in our classa common stock involves a high degree of risk. you should carefully consider the risks described below, together with the other information contained in this prospectus, before making your decision to invest in shares of our classa common stock. we cannot assure you that any of the events discussed in the risk factors below will not occur. these risks could have an adverse impact on our business, results of operations, financial condition and cash flows. if any of the following risks develops into an actual event, the trading price of our classa common stock could decline, and you could lose all or part of your investment. risks related to our business our revenues are dependent on the market value and composition of our aum, all of which are subject to fluctuation due to factors outside of our control. we derive the majority of our revenue from investment management fees, typically calculated as a percentage of the market value of our aum. as a result, our revenues are dependent on the value and composition of our aum, all of which are subject to fluctuation due to many factors, including: declines in prices of securities in our portfolios. the prices of the securities held in the portfolios we manage may decline due to any number of factors beyond our control, including, among others, declining stock or commodities markets, a general economic downturn, political uncertainty or acts of terrorism. the u.s. and global financial markets experienced extreme disruption in 2008 and the first quarter of 2009 and continue to be subject to an unusual amount of uncertainty and instability. current conditions affecting the global financial markets include persistently high unemployment rates in the united states, continued weakness in many real estate markets, increased austerity measures by several european governments, regional turmoil in the middle east, growing debt loads for many national and other governments and uncertainty about the consequences of governments discontinuing fiscal stimulus measures. such factors could cause an unusual degree of volatility and price declines for securities in the portfolios we manage. redemptions and other withdrawals. our investors generally may withdraw their funds at any time, on very short notice and without any significant penalty. a substantial portion of our revenue is derived from investment advisory agreements that are terminable by clients upon short notice or no notice and investors in the mutual funds we advise can redeem their investments in those funds at any time without prior notice. our growth in aum in recent years has included new clients and portfolios that may not have the same client retention characteristics as we have experienced in the past. in addition, in a declining stock market, the pace of redemptions could accelerate. investment performance. if our portfolios perform poorly, even over the short-term, as compared with our competitors or applicable third-party benchmarks, or the rankings of mutual funds we manage decline, we may lose existing aum and have difficulty attracting new assets. declines in fixed income markets. for fixed income investments, the value of our aum may decline as a result of changes in interest rates, available liquidity in the markets in which a security trades, an issuers actual or perceived creditworthiness, or an issuers ability to meet its obligations. if any of these factors cause a decline in our aum, it would result in lower investment management fees. if our revenues decline without a commensurate reduction in our expenses, our net income will be reduced and our business will be adversely affected. the loss of key investment professionals or members of our senior management team could have an adverse effect on our business. we depend on the skills and expertise of qualified investment professionals and our success depends on our ability to retain key employees, including members of our senior management team. our investment professionals possess substantial experience in investing and have been primarily responsible for the historically strong investment performance we have achieved. we particularly depend on our senior research group, which is a team of ten senior analysts who manage our portfolios, and our executive management team, which is a group of five individuals led by patrick cunningham, our chief executive officer. the loss of any of these key individuals could limit our ability to successfully execute our business strategy and could have an adverse effect on our business. any of our investment or management professionals may resign at any time, subject to various covenants not to compete with us. in addition, employee-owners are subject to additional covenants not to compete. we do not carry any key man insurance on any employees at this time. competition for qualified investment, management, marketing and client service professionals is intense and we may fail to successfully attract and retain qualified personnel in the future. our ability to attract and retain these personnel will depend heavily on the amount and structure of compensation and opportunities for equity ownership we offer. in connection with our transition to a public company, we intend to implement a compensation structure that uses a combination of cash and equity-based incentives as appropriate. we intend for overall compensation levels to remain commensurate with amounts paid to our named executive officers and other key employees in the past. however, our compensation may not be effective to recruit and retain the personnel we need, especially if our equity-based compensation does not return significant value to employees. any cost-reduction initiative or adjustments or reductions to compensation could negatively impact our ability to retain key personnel. in addition, changes to our management structure, corporate culture and corporate governance arrangements, including the changes associated with, and resulting from, our reorganization and this offering, could negatively impact our ability to retain key personnel.we derive substantially all of our revenues from contracts and relationships that may be terminated upon short or no notice. we derive substantially all of our revenues from investment advisory and sub-advisor agreements, all of which are terminable by clients upon short notice or no notice and without any significant penalty. our investment management agreements with mutual funds, as required by law, are generally terminable by the funds board of directors or a vote of the majority of the funds outstanding voting securities on not more than 60 days written notice. after an initial term, each funds investment management agreement must be approved and renewed annually by such funds board, including by its independent members. in addition, all of our separate account clients and some of the pooled investment vehicles, including mutual funds, that we sub-advise have the ability to re-allocate all or any portion of the assets that we manage away from us at any time with little or no notice. these investment management agreements and mutual fund and collective investment trust client relationships may be terminated or not renewed for any number of reasons. the decrease in revenues that could result from the termination of a material client relationship or group of client relationships could have an adverse effect on our business.we may be required to reduce the fees we charge, or our fees may decline due to changes in our aum composition, which could have an adverse effect on our profit margins and results of operations. our current fee structure may be subject to downward pressure due to a variety of factors, including a trend in recent years toward lower fees in the investment management industry. we may be required to reduce fees with respect to both the separate accounts we manage and the mutual funds we advise. in addition, we may charge lower fees to attract future new business as compared to our existing business, which may result in us having to reduce our fees with respect to our existing business accordingly. the investment management 20 agreements pursuant to which we advise mutual funds are terminable on short notice and, after an initial term, are subject to an annual process of review and renewal by the funds boards. as part of that annual review process, the fund board considers, among other things, the level of compensation that the fund has been paying us for our services, and that process may result in the renegotiation of our fee structure or increase our obligations, thus increasing the cost of our performance. further, in recent periods our average fee rate has been declining due to higher average separately managed account sizes triggered by market appreciation and new separately managed account clients. any fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.several of our portfolios involve investing principally in the securities of non-u.s. companies, which involve foreign currency exchange risk, and tax, political, social and economic uncertainties and risks. as of september30, 2011, approximately 37% of our aum across all of our portfolios was invested in securities of non-u.s. companies. fluctuations in foreign currency exchange rates could negatively affect the returns of our clients who are invested in these strategies. in addition, an increase in the value of the u.s. dollar relative to non-u.s. currencies is likely to result in a decrease in the u.s. dollar value of our aum, which, in turn, could result in lower revenue since we report our financial results in u.s. dollars. investments in non-u.s. issuers may also be affected by tax positions taken in countries or regions in which we are invested as well as political, social and economic uncertainty, particularly as a result of the recent decline in global economic conditions. declining tax revenues may cause governments to assert their ability to tax the local gains and/or income of foreign investors (including our clients), which could adversely affect clients interests in investing outside their home markets. many financial markets are not as developed, or as efficient, as the u.s. financial markets and, as a result, those markets may have limited liquidity and higher price volatility and lack established regulations. liquidity may also be adversely affected by political or economic events, government policies, social or civil unrest within a particular country, and our ability to dispose of an investment may also be adversely affected if we increase the size of our investments in smaller non-u.s. issuers. non-u.s. legal and regulatory environments, including financial accounting standards and practices, may also be different, and there may be less publicly available information about such companies. these risks could adversely affect the performance of our strategies that are invested in securities of non-u.s. issuers and may be particularly acute in the emerging or less developed markets in which we invest.we derive a substantial portion of our revenues from our core non-u.s. equity portfolios. as of september30, 2011, approximately 32% of our aum were invested in our core non-u.s. equity portfolios. as a result, a substantial portion of our operating results depends upon the performance of our core non-u.s. equity portfolios, and our ability to retain client assets in such portfolios. if a significant portion of the investors in our core non-u.s. equity portfolios decide to withdraw their investments or terminate their investment management agreements for any reason, including poor investment performance or adverse market conditions, our revenues from these portfolios would decline, which could have an adverse effect on our earnings and financial condition.the investment performance and/or the growth of our aum may be constrained if appropriate investment opportunities are not available or if we close certain of our portfolios. our ability to deliver strong investment performance depends in large part on our ability to identify appropriate investment opportunities in which to invest client assets. if we are unable to identify sufficient appropriate investment opportunities for existing and new client assets on a timely basis, our investment performance could be adversely affected. the risk that sufficient appropriate investment opportunities may be unavailable is influenced by a number of factors, including general market conditions, and is likely to increase as and if our aum increases, particularly if these increases occur very rapidly. if we determine that sufficient investment opportunities are not available for some or all of our portfolios, or we believe that in order to remain competitive or continue to produce attractive returns from some 21 or all of our portfolios we should limit the growth of those strategies, as we have done in the past, we may choose to limit the growth of the portfolio by limiting the rate at which we accept additional client assets for management under the portfolio, closing the portfolio to all or substantially all new investors or otherwise taking action to limit the flow of assets into the portfolio. if we misjudge the point at which it would be optimal to limit access to or close a portfolio, the investment performance of the portfolio could be negatively impacted. in addition, if we close access to a portfolio, we may offer a new portfolio to our clients, but we cannot guarantee that such new portfolio will attract clients or perform in a manner consistent with the closed portfolio. limiting access to or closing a portfolio, while designed to enable us to remain competitive or continue to produce attractive returns, may be seen by some investors in our class a common stock solely as a loss of revenue growth opportunities in the short-term, which could lead to a decrease in the value of our class a common stock and a loss on your investment.the significant growth we have experienced over the past nine years has been and may continue to be difficult to sustain, and we may have difficulty managing our growth effectively. our aum have increased from $6.4 billion as of december31, 2002 to $38.8 billion as of september30, 2011. the rapid growth in our aum represents a significant rate of growth that has been and may continue to be difficult to sustain. in particular, as the absolute amount of our aum increases, it will be more difficult to maintain levels of growth similar to those we have experienced in the past. the future growth of our business will depend on, among other things: our ability to retain key investment professionals; our ability to attract investment professionals as necessary; our ability to devote sufficient resources to maintaining existing portfolios and to selectively develop new portfolios; our success in achieving superior investment performance from our portfolios; our ability to maintain and extend our distribution capabilities; our ability to deal with changing market conditions; our ability to maintain adequate financial and business controls; and our ability to comply with new legal and regulatory requirements arising in response to both the increased sophistication of the investment management industry and the significant market and economic events of the last few years. unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our future profitability will be adversely affected. in addition, failure to successfully diversify into new asset classes may adversely affect our growth strategy and our future profitability.our portfolios may not obtain attractive returns under certain market conditions or at all. the goal of our investment process is to provide competitive absolute returns over full market cycles. accordingly, our portfolios may not perform well as compared to benchmarks or other investment managers strategies during certain periods of time or under certain market conditions, including periods of market uncertainty and volatility similar to what we have experienced in recent months. short-term underperformance may negatively affect our ability to retain clients and attract new clients. we are likely to be most out of favor when the markets are running on positive or negative price momentum and market prices become disconnected from underlying investment fundamentals, as was the case during the late 1990s as the technology market and mega cap stocks fueled the broad market upward. during and shortly 22 following such periods of relative under performance, we are likely to see our highest levels of client turnover, even if our absolute returns are positive. loss of client assets and the failure to attract new clients could adversely affect our revenues and growth.the historical returns of our existing portfolios may not be indicative of their future results or of the portfolios we may develop in the future. we have presented the historical returns of our existing portfolios under businessour competitive strengthstrack record of consistent investment excellence through multiple market cycles. the historical returns of our portfolios and the ratings and rankings we or the mutual funds that we advise have received in the past should not be considered indicative of the future results of these portfolios or of any other portfolios that we may develop in the future. the investment performance we achieve for our clients varies over time and the variance can be wide. the ratings and rankings we or the mutual funds we advise have received are typically revised monthly. the historical performance and ratings and rankings included in this prospectus are as of september30, 2011 and for periods then ended except where otherwise stated. the performance we have achieved and the ratings and rankings received at subsequent dates and for subsequent periods may be higher or lower and the difference could be material. our portfolios returns have benefited during some periods from investment opportunities and positive economic and market conditions. in other periods, such as in 2008 and the first quarter of 2009, general economic and market conditions have negatively affected our portfolios returns. these negative conditions may occur again, and in the future we may not be able to identify and invest in profitable investment opportunities within our current or future portfolios.we depend on third-party distribution sources to market our portfolios and access our client base. our ability to attract additional assets to manage is dependent on our access to third-party intermediaries.we gain access to mutual fund investors and some retail and institutional clients through third parties, including mutual fund platforms and financial intermediaries. as of september30, 2011, the largest relationship we have with a third party represents 5.3% of our total aum and the mutual fund platform representing the largest portion of our fund assets represents an additional 5.7% of our total aum. we compensate most of the intermediaries through which we gain access to investors in our mutual funds by paying fees, most of which are based on a percentage of assets invested in our mutual funds through that intermediary and with respect to which that intermediary provides services. these distribution sources and client bases may not continue to be accessible to us on terms we consider commercially reasonable, or at all. limiting or the total absence of such access could have an adverse effect on our results of operations. many of these consultants review and evaluate our products and our firm from time to time. poor reviews or evaluations of a particular product, portfolio or us as an investment management firm may result in client withdrawals or may impair our ability to attract new assets through these intermediaries. in addition, the recent economic downturn and consolidation in the broker-dealer industry may lead to reduced distribution access and increases in fees we are required to pay to intermediaries. if such increased fees should be required, refusal to pay them could restrict our access to those client bases while paying them could adversely affect our profitability.our efforts to establish new portfolios or new products or services may be unsuccessful and could negatively impact our results of operations and our reputation. as part of our growth strategy, we may seek to take advantage of opportunities to develop new portfolios consistent with our philosophy of managing portfolios to meet our clients objectives and using a team investment approach. the costs associated with establishing a new portfolio initially likely will exceed the revenues that the portfolio generates. if any such new portfolio performs poorly or fails to attract sufficient assets to manage, our results of operations could be negatively impacted. further, a new portfolios poor performance may negatively impact our reputation and the reputation of our other portfolios within the investment community. in addition, we have developed and may seek from time to time to develop new products and services to take advantage of opportunities involving technology, insurance, participant and plan sponsor 23 education and other products beyond investment management. the development of these products and services could involve investment of financial and management resources and may not be successful in developing client relationships, which could have an adverse effect on our business. the cost to develop these products initially will likely exceed the revenue they generate. if establishing new portfolios or offering new products or services requires hiring new personnel, to the extent we are unable to recruit and retain sufficient personnel, we may not be successful in further diversifying our portfolios, client assets and business, which could have an adverse effect on our business and future prospects.our failure to comply with investment guidelines set by our clients, including the boards of mutual funds, and limitations imposed by applicable law, could result in damage awards against us and a loss of our aum, either of which could adversely affect our reputation, results of operations or financial condition. when clients retain us to manage assets on their behalf, they generally specify certain guidelines regarding investment allocation that we are required to follow in managing their portfolios. in addition, the boards of mutual funds we manage generally establish similar guidelines regarding the investment of assets in those funds. we are also required to invest the mutual funds assets in accordance with limitations under the u.s. investment company act of 1940, as amended, or the 1940 act, and applicable provisions of the internal revenue code of 1986, as amended, or the code. other clients, such as plans subject to the employee retirement income security act of 1974, as amended, or erisa, or non-u.s. funds, require us to invest their assets in accordance with applicable law. our failure to comply with any of these guidelines and other limitations could result in losses to clients or investors in our products which, depending on the circumstances, could result in our obligation to make clients whole for such losses. if we believed that the circumstances did not justify a reimbursement, or clients believed the reimbursement we offered was insufficient, clients could seek to recover damages from us, withdraw assets from our products or terminate their investment management agreement with us. any of these events could harm our reputation and adversely affect our business.a change of control of our company could result in termination of our investment advisory agreements. under the 1940 act, each of the investment advisory agreements for securities and exchange commission, or sec, registered mutual funds that our affiliate, mna, advises automatically terminates in the event of its assignment, as defined under the 1940 act. if such an assignment were to occur, mna could continue to act as adviser to any such fund only if that funds board of directors and stockholders approved a new investment advisory agreement, except in the case of certain of the funds that we sub-advise for which only board approval would be necessary. in addition, under the u.s. investment advisers act of 1940, as amended, or the advisors act, each of the investment advisory agreements for the separate accounts we manage may not be assigned without the consent of the client. an assignment may occur under the 1940 act and the advisers act if, among other things, mna undergoes a change of control. in certain other cases, the investment advisory agreements for the separate accounts we manage require the consent of the client for any assignment. if such an assignment occurs, we cannot be certain that mna will be able to obtain the necessary approvals from the boards and stockholders of the mutual funds that it advises or the necessary consents from separate account clients.operational risks may disrupt our business, result in losses or limit our growth. we are heavily dependent on the capacity and reliability of the communications, information and technology systems supporting our operations, whether developed, owned and operated by us or by third parties. operational risks such as trading or operational errors or interruption of our financial, accounting, trading, compliance and other data processing systems, whether caused by fire, natural disaster or pandemic, power or telecommunications failure, act of terrorism or war or otherwise, could result in a disruption of our business, liability to clients, regulatory intervention or reputational damage, and thus adversely affect our business. some types of operational risks, including, for example, trading errors, may be increased in periods of increased volatility, which can magnify the cost of an error. although we have back-up systems in place, our back-up procedures and capabilities in the event of a failure or interruption may not be adequate, and the fact that we operate our business out of multiple physical locations may make such failures and interruptions difficult to 24 address on a timely and adequate basis. as and if our client base, number of portfolios and/or physical locations increase, developing and maintaining our operational systems and infrastructure may become increasingly challenging, which could constrain our ability to expand our business. any upgrades or expansions to our operations or technology to accommodate increased volumes of transactions or otherwise may require significant expenditures and may increase the probability that we will suffer system degradations and failures. in addition, if we are unsuccessful in executing any such upgrades or expansions, we may instead have to hire additional employees, which could increase operational risk due to human error. we also depend on our headquarters in fairport, new york, where a majority of our employees, administration and technology resources are located, for the continued operation of our business. any significant disruption to our headquarters could have an adverse effect on our business.we depend on third-party service providers for services that are important to our business, and an interruption or cessation of such services by any such service providers could have an adverse effect on our business. we depend on a number of service providers, including custodial and clearing firms, and vendors of communications and networking products and services. we cannot assure you that any of these providers will be able to continue to provide these services in an efficient manner or that they will be able to adequately expand their services to meet our needs. an interruption or malfunction in or the cessation of an important service by any third-party and our inability to make alternative arrangements in a timely manner, or at all, could have an adverse impact on our business, financial condition and operating results.employee misconduct could expose us to significant legal liability and reputational harm. we operate in an industry in which integrity and the confidence of our clients are of critical importance. accordingly, if any of our employees engage in illegal or suspicious activities or other misconduct, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, client relationships and ability to attract new clients. for example, our business often requires that we deal with confidential information. if our employees were to improperly use or disclose this information, even if inadvertently, we could suffer serious harm to our reputation, financial condition and current and future business relationships. it is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. in addition, the sec recently has increased its scrutiny of the use of non-public information obtained from corporate insiders by professional investors. misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in an adverse effect on our reputation and our business.improper disclosure of personal data could result in liability and harm our reputation. we and our service providers store and process personal client information. it is possible that the security controls, training and other processes over personal data may not prevent the improper disclosure of client information. such disclosure could harm our reputation as well and subject us to liability, resulting in increased costs or loss of revenue.failure to properly address conflicts of interest could harm our reputation, business and results of operations. as we expand the scope of our business and our client base, we must continue to monitor and address any conflicts between our interests and those of our clients. the sec and other regulators have increased their scrutiny of potential conflicts of interest, and we have implemented procedures and controls that we believe are reasonably designed to address these issues. however, appropriately dealing with conflicts of interest is complex and if we fail, or appear to fail, to deal appropriately with conflicts of interest, we could face reputational damage, litigation or regulatory proceedings or penalties, any of which could adversely affect our reputation, business and results of operations. if our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses. in order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems that enable us to identify, monitor and control our exposure to operational, legal and reputational risks. our risk management methods may prove to be ineffective due to their design or implementation, or as a result of the lack of adequate, accurate or timely information or otherwise. if our risk management efforts are ineffective, we could suffer losses that could have an adverse effect on our financial condition or operating results. additionally, we could be subject to litigation, particularly from our clients, and sanctions or fines from regulators. our techniques for managing risks in client portfolios may not fully mitigate the risk exposure in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate.the cost of insuring our business is substantial and may increase. our insurance costs are substantial and can fluctuate significantly from year to year. in addition, certain insurance coverage may not be available or may only be available at prohibitive costs. as we renew our insurance policies, we may be subject to additional costs resulting from rising premiums, the assumption of higher deductibles or co-insurance liability and, to the extent certain of our mutual funds purchase separate director and officer or errors and omissions liability coverage, an increased risk of insurance companies disputing responsibility for joint claims. in addition, we intend to obtain additional liability insurance for our directors and officers in connection with this offering. higher insurance costs and incurred deductibles, as with any expense, would reduce our net income.we may elect to pursue growth in the united states and abroad through acquisitions or joint ventures, which-0.15191392.021261.15178.833150000000329.992False2011
73.060.510000.0NaNROCKVILLE9.0000-0.014100.0010877.81FalseNASDQFalseFalseFinanceInsuranceOtherNaN60500000.0HealthExtras IncNaN880000.0Warburg Dillon Read Inc3336.16NaN6.0081.011.0NaNTrueNaN07.4383758.00108.00159.507Risk Factors -------------------------------------------------------------------------------- You should consider carefully the following risk factors and all other information contained in this prospectus before purchasing our common stock Investing in our common stock involves a high degree of risk. Any of the following risks could materially harm our business, operating results and financial condition and could result in a complete loss of your investmentAdditional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business, operating results and financial condition in the future RISKS RELATED TO OUR BUSINESS Because we have a limited operating history, our business prospects are subject to a great deal of uncertaintyWhile our product development efforts have been ongoing for the past two years, we only began revenue generating activities in January 1999. This limited history of operating our business means that you have little basis on which to evaluate us and our prospects and that our business prospects are subject to a great deal of uncertainty and risksWe have not been profitable and may not become profitable in the future We incurred operating losses of approximately $4.7 million in 1997, $6.5 million in 1998 and $6.5 million for the nine months ended September 30, 1999, and at September 30, 1999, we had an accumulated deficit of $19.1 millionBecause we plan to continue to significantly increase our operating expenses in an attempt to increase our member base, we will need to generate significantly higher revenues to achieve profitability. Even if we achieve profitability, we may not be able to maintain profitability in the future. In addition, as our business model evolves, we expect to introduce a number of new products and services that may or may not be profitable for usOur future profitability is dependent, to a significant extent, upon increased consumer demand for additional products, which we are in the process of developing or may develop in the future Most of our revenue currently is derived from members purchasing membership programs which include disability benefits. We believe our future profitability is dependent upon achieving substantial increases in sales of our programs, including those providing excess health insurance coverage and other benefits we are developing or may develop in the future. To the extent these products include insurance features, they generally will require regulatory approvalsIf we do not achieve these increased sales, we may never achieve profitability If the sale of our membership programs over the Internet does not achieve widespread consumer acceptance, we may never achieve profitability To date, we primarily have promoted our membership programs through mailings to credit card or other customers of banks. However, we intend to significantly increase the distribution of our programs over the Internet. Thus, our future profitability is dependent in large part on our ability to achieve widespread consumer acceptance of purchasing our programs over the Internet. The development of an online market for programs, such as those we offer, has only recently begun, is rapidly evolving and likely will be characterized by an increasing number of market entrants. Therefore, there is significant uncertainty with respect to the viability and growth potential of this marketOur future growth, if any, will depend on, among other things, the following critical factors: . the growth of the Internet as a commerce medium generally, and as a market for consumer financial and insurance products and services specifically; . success in persuading consumers to purchase their own supplemental health and disability benefits, rather than, or in addition to, group insurance offered through their employer; 4 . success in cost-effectively marketing our programs to a sufficiently large number of consumers; . our ability to fulfill coverage requests on an efficient and timely basis; and . assuring consumers that the benefits in our programs purchased online are reliable.There can be no assurance that an online market for our programs will develop or that consumers will significantly increase their use of the Internet for obtaining the types of products and services included in the programs that we sell. If an online market for these products fails to develop, or develops more slowly than we expect, or if our programs do not achieve widespread market acceptance, the prospects for our achieving profitable operations will be significantly reducedIf we lose one or more of our marketing relationships, our access to potential customers would decline and sales and revenues would suffer A substantial majority of all of our programs sold to date have been through mailings sent by banks to their credit card and other customers. If we lose one or more of our marketing relationships with credit card issuers and are unable to replace those relationships with other marketing outlets, our access to potential customers would decline and sales and revenues would sufferIf we are not able to achieve a high level of brand recognition and consumer demand for our programs, we will not achieve the level of revenues we need to be profitable There are a growing number of websites that offer consumers access to information regarding insurance coverage alternatives and product pricing. Our programs may be considered to compete with these and other distribution channels for insurance products. We believe that broader recognition of the HealthExtras brand and increased consumer demand for our programs are essential to our future success. To attempt to achieve that recognition and demand, we intend to continue to pursue an aggressive brand-enhancement strategy consisting of our traditional print advertising, as well as national radio and television advertising, online marketing and promotional efforts. This effort will require significantly greater expenditures than we have been able to make to date. If these expenditures do not result in a sufficient increase in revenues, we will not achieve profitability. In addition, we may expand our programs to include additional types of insurance and services. A portion of any increased selling and marketing expenditures could be used to promote these new programs. We have no assurance that there will be any market acceptance for new programs. Failure to generate sufficient revenues to cover the related expenditures of new products would reduce our chances to become profitableThe loss of our relationship with Christopher Reeve to promote our programs could significantly impair our brand recognition and, thus, our ability to sell our programs Our agreement for Christopher Reeve to promote our programs currently expires in July 2002. The loss of the Christopher Reeve identification with our programs, upon termination of our contract or otherwise, could significantly reduce our ability to sell our programsIf we lose our relationships with our benefit providers, we could have difficulty meeting demand for the products and services included in the programs we sell Supplemental health and disability insurance are key components of our programs. These insurance coverages are provided by Reliance National Insurance Company. Our contract with Reliance National expires in February 2002 and can be terminated by Reliance National prior to expiration if, among other things, we breach the contract or are the subject of regulatory action or excessive consumer complaints. In addition, Reliance National could decide to stop issuing insurance for our programs at any time. If Reliance National suspended or terminated our contract with them, or stopped issuing policies, we would not be able to offer our programs for sale until we obtained another insurance company to provide the insurance coverage. Any other insurance company would have to obtain regulatory approval in the various states for those insurance products. This could require an extended period of time.In addition, should Reliance be unable to maintain an insurance rating satisfactory to our distribution partners and potential customers, our program membership could be reduced. Also, our contract with Reliance includes a right of first refusal provision which could limit our ability to incorporate insurance products of other companies in our programs. In such circumstances, our revenues and profitability could be adversely affected. The Reliance National Insurance Group is rated A- (Excellent) by A.M. Best Co. On October 21, 1999, however, A.M. Best placed that rating of Reliance "under review with negative implications," and indicated it expected to complete its review during the first quarter of 2000. 5We are also dependent on the other providers of benefits included in our programs. These benefits are provided pursuant to arrangements that may be terminated on relatively short notice. If we lose these relationships and are unable to replace them quickly and cost effectively, we would not be able to satisfy consumer demand for our programsWe may experience significant fluctuations in our quarterly results of operations which will make it difficult for investors to make reliable period- to-period comparisons and may contribute to volatility in our stock price Our quarterly expenses have fluctuated significantly in the past, and we expect our quarterly revenues and expenses to continue to fluctuate significantly in the future. The causes for fluctuations could include, among other factors: . changes in acceptance levels for our benefit program by consumers; . our levels of marketing expenditures; . renewal rate experience for our benefit programs; . the initiation of new or increased distribution methods, services and products by our competitors; . price competition by insurance companies in their sale of insurance products; and . the level of Internet use to purchase insurance or similar type products.We believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and not good indicators of our future performance Due to the above-mentioned and other factors, it is possible that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. If this happens, the trading price of our common stock would likely decreaseIf we do not manage our growth effectively, we will not be able to operate profitably We only began offering our programs this year, and we have been expanding our operations rapidly. Our growth strategy, if successful, will result in further expansion. We can achieve profitable operation, however, only if we are able to manage our growth effectively. Our growth in operations has placed significant demands on our management and other resources, which is likely to continueUnder these conditions, it is important for us to retain our existing management and to attract, hire and retain additional highly skilled and motivated officers, managers and employees and improve existing systems and/or implement new systems for: . transaction processing; . operational and financial management; and . training, integrating and managing our growing employee base.We may not be successful in managing or expanding our operations or maintaining adequate management, financial and operating systems and controls If the providers of the benefits included in our programs fail to provide those benefits, we could become subject to liability claims by our program members We arrange for the provision by others of the benefits included in our member programs. If the firms with which we have contracted to provide those benefits fail to provide them as required, or are negligent or otherwise culpable in providing them, we could become involved in any resulting claim or litigationCompetition could hinder our ability to build our membership base and prevent us from achieving profitable operations The markets for the benefit products and services included in the programs we offer are intensely competitive and characterized by changing technology, evolving regulatory requirements and changing consumer demands. If we are not able to compete in those markets and under those circumstances, our ability to build our membership base would be hindered and we would not be able to achieve profitable operations. We compete with both traditional insurance distributions channels, including insurance agents and brokers, new non-traditional channels such as commercial banks and savings and loan associations, and a growing number of distributors.We also potentially face competition from a number of large online services that have expertise in developing online commerce and in facilitating a high volume of Internet traffic. Other large companies with strong brand recognition, technical expertise and experience in online commerce and direct marketing also 6 could seek to compete in the online market for insurance and similar productsAny of these firms could seek to compete against us through traditional channels or by copying the products and services included in the programs we sell or our business model. There can be no assurance that we will be able to compete successfully with any of these current or potential competitorsRISKS RELATED TO REGULATION If we fail to comply with all of the various and complex laws and regulations governing our business, we could be subject to fines, additional licensing requirements or the inability to market in particular jurisdictions Complex laws, rules and regulations of each of the 50 states and the District of Columbia pertaining to insurance impose strict and substantial requirements on insurance coverage sold to consumers and businesses. Compliance with these laws, rules and regulations can be arduous and imposes significant costs. The underwriter of the insurance benefits included in HealthExtras programs is responsible for obtaining and maintaining regulatory approvals for those benefits. If the appropriate regulatory approvals for the insurance benefits included in our programs are not maintained, we would have to stop including those benefits. An independent licensed insurance agency is responsible for the solicitation of insurance benefits involved in HealthExtras programs. Each jurisdiction's insurance regulator typically has the power, among other things, . administer and enforce the laws and promulgate rules and regulations applicable to insurance, including the quotation of insurance premiums; . approve policy forms and regulate premium rates; . regulate how, by which personnel and under what circumstances, an insurance premium can be quoted and published; and . regulate the solicitation of insurance and license insurance companies, agents and brokers who solicit insurance.State insurance laws and regulations are complex and broad in scope and are subject to periodic modification as well as differing interpretations. There can be no assurance that insurance regulatory authorities in one or more states will not determine that the nature of our business requires us to be licensed under applicable insurance laws. A determination to that effect or that we or our business partners are not in compliance with applicable regulations could result in fines, additional licensing requirements or inability to market our programs in particular jurisdictions. Such penalties could significantly increase our general operating expenses and harm our business. In addition, even if the allegations in any regulatory or legal action against us turn out to be false, negative publicity relating to any such allegation could result in a loss of consumer confidence and significant damage to our brand. We believe that because many consumers and insurance companies are not yet comfortable with the concept of purchasing insurance online, the publicity relating to any such regulatory or legal issues could significantly reduce sales of our programsRegulation of the sale of insurance over the Internet and of electronic commerce generally is unsettled, and future laws, regulations and interpretations could hinder our ability to offer programs over the Internet The distribution of our programs including an insurance component over the Internet subjects us to additional risk as most insurance laws and regulations have not been modified to clarify or amend their application to Internet transactions. Currently, many state insurance regulators and legislators are exploring the need for specific regulation of insurance sales over the Internet. Such regulation could dampen the growth of the Internet as a means of providing insurance services. Moreover, the application of laws governing general commerce on the Internet remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing insurance, intellectual property, privacy and taxation apply to the Internet. In addition, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws and regulations that may impose additional burdens on companies conducting business over the Internet. Any new laws or regulations or new interpretations of existing laws or regulations relating to the Internet could hinder our ability to offer programs over the Internet. 7 We could be subject to legal liability based upon the information on our websiteOur members may rely upon the information published on our website regarding insurance coverage, exclusions, limitations and ratings, and the other benefits included in our programs. To the extent that the information we provide is not accurate, we could be liable for damages. These types of claims could be time- consuming and expensive to defend, divert management's attention, and could cause consumers to lose confidence in our service. As a result, these types of claims, whether or not successful, could harm our businessRISKS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE If we experience failures of, or capacity constraints in, our systems or the systems of third parties on which we rely, sales of our programs likely would be reduced and our reputation could be damaged We use both internally developed and third-party systems to operate the Internet aspects of our business. If the number of users of our service increases substantially, we will need to significantly expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate or timing of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our service has experienced periodic system interruptions, and it is likely that these interruptions will continue to occur from time to time. Additionally, our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, acts of vandalism and similar events. We may not carry sufficient business interruption insurance to compensate for losses that could occur. Any system failure that causes an interruption in service or decreases the responsiveness of our service would impair our revenue-generating capabilities, and could damage our reputation and our brand nameIf we fail to adapt to rapid technological change, our ability to compete will be significantly impeded Our market is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. Our future success will depend, in part, on our ability to adapt to rapidly changing technologies by continually improving the features and reliability of our service. We may experience difficulties that could delay or prevent the successful introduction or marketing of new products and services. In addition, new enhancements must meet the requirements of our current and prospective subscribers and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our service or infrastructures or adapt our technology to respond to these changesIf we or our vendors experience Year 2000 problems, our ability to sell and service our programs would be disrupted The uncertainty posed by year 2000 issues could adversely affect our business in a number of significant ways. Although we believe that our internally developed systems and technology are year 2000 ready, our information technology system nevertheless could be substantially impaired or cease to operate due to year 2000 problems. Additionally, we rely on information technology supplied by third parties. Year 2000 problems that any third parties or we experience would disrupt our ability to sell and service our programsAdditionally, the Internet could face serious disruptions arising from year 2000 problems If we are unable to safeguard the security and privacy of our program members' information, our reputation would be damaged and we could be subject to litigation and liability A significant barrier to electronic commerce and online communications has been the need for secure transmission of confidential information over the Internet. Our ability to secure the transmission of confidential information over the Internet is essential in maintaining consumer confidence in our service. In addition, because we handle confidential and sensitive information about our program members, any security breaches would damage our reputation and could expose us to litigation and liability. We cannot guarantee that our systems will prevent security breachesIf the Internet does not continue to function to provide broad scale and dependable service as a transaction medium, we might not be able to achieve the substantial increases in sales of our programs which we believe are necessary to achieve profitability Our success will depend upon the maintenance of the Internet's infrastructure and its ability to cope with its significant growth and increased traffic. This will require a reliable network with the necessary 8 speed, data capacity and security, and the timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. Users of the Internet have experienced a variety of outages and other delays as a result of damage to portions of their infrastructure or that of their service providers, and we could face such outages and delays in the future. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards to handle increased levels of activity or due to increased government regulation. The adoption of new standards or government regulation may require us to incur substantial compliance costsRISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK Because our shares have not been publicly traded before this offering, the public offering price may not accurately reflect the trading price of our stock, and our stock price may be volatile Prior to this offering, you could not buy or sell our common stock publiclyAn active public market for our common stock may not develop or be sustained after this offering. Although the public offering price will be negotiated between the underwriters and us based on several factors, the market price after the offering may vary from the public offering price. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations. Recently, the stock market has experienced significant price and volume fluctuations, and the market prices of securities of Internet-related companies in particular have been highly volatile. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our common stock. In addition, the market prices for stocks of Internet-related companies, particularly following an initial public offering, have been known to reach levels that bear no relationship to the operating performance of such companies. Such market prices generally are not sustainable and are subject to wide variations. If our common stock trades to such levels following this offering, it likely will thereafter experience a material decline.In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation Securities litigation could result in substantial costs, divert management's attention and resources, and harm our financial condition and results of operationsFuture sales of our common stock may cause our stock price to decline Future sales of our common stock, or the availability of our common stock for sale, may cause our stock price to decline. After this offering, we will have 27,600,000 shares of common stock outstanding. The federal securities laws impose restrictions on the ability of stockholders who acquired their shares prior to this offering to resell their shares. Also, all holders of common stock or securities convertible into or exercisable or exchangeable for common stock issued prior to the offering and all of our officers have agreed, subject to certain limited exceptions, not to sell their shares for a period of 180 days after the date of this prospectus. After these restrictions lapse, the holders of these restricted shares may choose to sell some or all of their holdings. In addition, holders of substantially all of our shares of common stock outstanding prior to this offering have registration rights with respect to such sharesOur existing shareholders will own a substantial majority of our stock and will continue to control us after this offering; their interests may not be the same as that of our public stockholders Following this offering, Highland Investments, LLC and Health Partners will control 80.1% of our outstanding common stock. For information regarding the control of Highland Investments and Health Partners, see "Principal Stockholders." As a result, if these stockholders act together, they will be able to take any of the following actions without the approval of our public stockholders: . elect our directors; . amend certain provisions of our charter; . approve a merger, sale of assets or other major corporate transaction; . defeat any takeover attempt, even if it would be beneficial to our public stockholders; and . otherwise control the outcome of all matters submitted for a stockholder vote. 9NaN19.931388.91NaN60500000NaNFalse1999
89.0139.110000.0111.587367REDWOOD CITY17.00000.55197.9112268.63FalseNASDQTrueTrueBusiness Equipment -- Computers, Software, and Electronic EquipmentBusiness ServicesBusiness Equipment, Telephone and Television Transmission99999.5139100000.0Bigband Networks Inc0.000000NaNMorgan Stanley\nMerrill Lynch & Co Inc2416.15-25.36714.018512.013.00.375000False99999.518.6012009.00109.00143.006risk factors you should carefully consider the risks described below before making an investment decision. our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. in assessing the risks described below, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock. risks related to our business we depend on the adoption of advanced technologies by cable operators and telephone companies for substantially all of our net revenues, and any decrease or delay in capital spending for these advanced technologies would harm our operating results, financial condition and cash flows. substantially all of our sales are dependent upon the adoption of advanced technologies by cable operators and telephone companies, and we expect these sales to continue to constitute a significant majority of our sales for the foreseeable future. demand for our products will depend on the magnitude and timing of capital spending by service providers on advanced technologies for constructing and upgrading their network infrastructure, and a reduction or delay in this spending could have a material adverse effect on our business. the capital spending patterns of our existing and potential customers are dependent on a variety of factors, including: available capital and access to financing; annual budget cycles; overall consumer demand for video, voice and data services and the acceptance of newly introduced services; competitive pressures, including pricing pressures; the impact of industry consolidation; the strategic focus of our customers and potential customers; technology adoption cycles and network architectures of service providers, and evolving industry standards that may impact them; the status of federal, local and foreign government regulation of telecommunications and television broadcasting, and regulatory approvals that our customers need to obtain; discretionary customer spending patterns; bankruptcies and financial restructurings within the industry; and general economic conditions. any slowdown or delay in the capital spending by service providers as a result of any of the above factors would likely have a significant impact on our quarterly revenue and profitability levels.our operating results are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors or our guidance, causing our stock price to decline. our operating results have fluctuated in the past and are likely to continue to fluctuate, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside of our control. these factors include: the level and timing of capital spending of our customers, both in the united states and in international markets; the timing, mix and amount of orders, especially from significant customers; 7 changes in market demand for our products; our ability to secure significant orders from telephone companies; our mix of products sold between video products, which generally have higher margins, and our cable modem termination system, or cmts, data products, which generally have lower margins; the mix of software and hardware products sold; our unpredictable and lengthy sales cycles, which typically range from nine to eighteen months; the timing of revenue recognition on sales arrangements, which may include multiple deliverables; new product introductions by our competitors; market acceptance of new or existing products offered by us or our customers; competitive market conditions, including pricing actions by our competitors; our ability to complete complex development of our software and hardware on a timely basis; our ability to design, install and receive customer acceptance of our products; unexpected changes in our operating expense; the potential loss of key manufacturer and supplier relationships; the cost and availability of components used in our products; changes in domestic and international regulatory environments; and the impact of new accounting rules. we establish our expenditure levels for product development and other operating expense based on projected sales levels, and our expenses are relatively fixed in the short term. accordingly, variations in the timing of our sales can cause significant fluctuations in operating results. as a result of all these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors or our guidance, which would likely cause the trading price of our common stock to decline substantially.we anticipate that our gross margins will fluctuate with changes in our product mix and expected decreases in the average selling prices of our products, which may adversely impact our operating results. our industry has historically experienced a decrease in average selling prices. we anticipate that the average selling prices of our products will decrease in the future in response to competitive pricing pressures, increased sales discounts and new product introductions by our competitors. we may experience substantial decreases in future operating results due to the decrease of our average selling prices. to maintain our gross margin levels, we must develop and introduce on a timely basis new products and product enhancements as well as continually reduce our product costs. our failure to do so would likely cause our revenue and gross margins to decline, which could have a material adverse effect on our operating results and cause the price of our common stock to decline. we also anticipate that our gross margins will fluctuate from period to period as a result of the mix of products we sell in any given period, with our video products generally yielding higher gross margins than our data products. if our sales of these lower margin products significantly expand in future quarterly periods, our overall gross margin levels and operating results would be adversely impacted.our continued growth will depend significantly on our ability to deliver products that help enable telephone companies to provide video services. if the projected growth in demand for video services from telephone companies does not materialize or if these service providers find alternative methods of delivering video services, future sales of our video products will suffer. prior to 2006, our sales were principally to cable operators. in 2006, however, we generated significant sales from telephone companies. our growth is dependent on our ability to sell video products to telephone companies that are increasingly reliant on the delivery of video services to their customers. although a number of our 8 existing products are being deployed in these networks, we will need to devote considerable resources to obtain orders, qualify our products and hire knowledgeable personnel to address telephone company customers, each of which will require significant time and financial commitment. these efforts may not be successful in the near future, or at all. if technological advancements allow these telephone companies to provide video services without upgrading their current system infrastructure or that allow them a more cost-effective method of delivering video services than our products, projected sales of our video products will suffer. even if these providers choose our video products, they may not be successful in marketing video services to their customers, in which case additional sales of our products would likely be reduced. selling successfully to the telephone company market will be a significant challenge for us. several of our largest competitors, such as cisco systems and motorola corporation, have mature customer relationships with many of the largest telephone companies, while we have limited recent experience with sales and marketing efforts designed to reach these potential customers. in addition, telephone companies face specific network architecture and legacy technology issues that we have only limited expertise in addressing. if we fail to penetrate the telephone company market successfully, our growth in revenues and operating results would be correspondingly limited.our customer base has become increasingly concentrated, and there are a limited number of potential customers for our products. the loss of any of our key customers would likely reduce our revenues significantly. historically, a large portion of our sales have been to a limited number of customers. sales to our five largest customers accounted for approximately 90% of our net revenues in the three months ended december 31, 2006, approximately 79% of our net revenues in the year ended december31, 2006, approximately 69% of our net revenues in the year ended december31, 2005, and approximately 61% of our net revenues in the year ended december31, 2004. in 2006, comcast, cox, time warner cable and verizon each represented 10% or more of our net revenues. in 2005, adelphia, cox and time warner cable each represented 10% or more of our net revenues. in 2004, adelphia, comcast, cox and time warner cable each represented 10% or more of our net revenues. we anticipate that a large portion of our revenues will continue to depend on sales to a limited number of customers, and we do not have contracts or other agreements that guarantee continued sales to these or any other customers. in addition, as the consolidation of ownership of cable operators and telephone companies continues, we may lose existing customers and have access to a shrinking pool of potential customers. we expect to see continuing industry consolidation and customer concentration due to the significant capital costs of constructing video, voice and data networks and for other reasons. for example, adelphia, formerly the fifth largest cable company in the united states, which accounted for 5% of our net revenue in the year ended december31, 2006, was sold in 2006 to comcast and time warner cable, the two largest u.s. cable operators. further business combinations may occur in our customer base which will result in increased purchasing leverage by these customers over us. this may reduce the selling prices of our products and services and as a result may harm our business and financial results. many of our customers desire to have two sources for the products we sell to them. as a result, our future revenue opportunities could be limited, and our profitability could be adversely impacted. the loss of, or reduction in orders from, any of our key customers would significantly reduce our revenues and have a material adverse impact on our business, operating results and financial condition.the timing of a significant portion of our net revenues is dependent on complex systems integration. we derive a significant portion of our net revenues from sales that include the network design, installation and integration of equipment, including equipment acquired from third parties to be integrated with our products to the specifications of our customers. we base our revenue forecasts on the estimated timing to complete the network design, installation and integration of our customer projects and customer acceptance of those products. the systems of our customers are both diverse and complex, and our ability to configure, test and integrate our systems with other elements of our customers networks is dependent upon technologies provided to our 9 customers by third parties. as a result, the timing of our revenue related to the implementation of our product applications in these complex networks is difficult to predict and could result in lower than expected revenue in any particular quarter. similarly, our ability to deploy our equipment in a timely fashion can be subject to a number of other risks, including the availability of skilled engineering and technical personnel, the availability of equipment produced by third parties and our customers need to obtain regulatory approvals.if revenues forecasted for a particular period are not realized in such period due to the lengthy, complex and unpredictable sales cycles of our products, our operating results for that or subsequent periods will be harmed. the sales cycles of our products are typically lengthy, complex and unpredictable and usually involve: a significant technical evaluation period; a significant commitment of capital and other resources by service providers; substantial time required to engineer the deployment of new technologies or new video, voice and data services; substantial testing and acceptance of new technologies that affect key operations; and substantial test marketing of new services with subscribers. for these and other reasons, our sales cycles generally have been between nine and eighteen months, but can last longer. if orders forecasted for a specific customer for a particular quarter do not occur in that quarter, our operating results for that quarter could be substantially lower than anticipated. our quarterly and annual results may fluctuate significantly due to revenue recognition policies and the timing of the receipt of orders.we only recently became profitable, and we may not be able to sustain profitability in future periods. the three-month periods ended september30, 2006 and december31, 2006 have been the only fiscal quarters in which we have achieved profitability. we were profitable for our 2006 fiscal year; however, we reported losses for our 2005 and 2004 fiscal years. we are continuing to incur increased research and development, sales and marketing, and general and administrative expenses. as a result, we may not be able to sustain profitability in future fiscal quarters or achieve profitability on an annual basis in the future.our independent registered public accountants have identified and reported to us material weaknesses in our internal controls for the years ended december31, 2004 and 2005 that, if not properly remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies. in connection with the audits of our consolidated financial statements for each of the years ended december31, 2004 and 2005, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting under the standards established by the american institute of certified public accountants. our independent registered public accounting firm has indicated that the material weaknesses in our revenue recognition process and financial statement closing process resulted from having insufficient procedures in place and an insufficient number of qualified resources in our finance department with the required proficiency to apply our accounting policies in accordance with u.s. generally accepted accounting principles, or gaap. our independent registered public accounting firm was not, however, engaged to audit the effectiveness of our internal control over financial reporting. if such an evaluation had been performed or when we are required to perform such an evaluation, additional material weaknesses, significant deficiencies and other control deficiencies may have been or may be identified. ensuring that we have adequate internal financial and accounting controls and procedures in place to help produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently, as described further under we will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results. 10 because of these material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. while we have completed our remediation efforts to address these material weaknesses, we cannot assure you that these remediation efforts have been entirely successful or that similar material weaknesses will not recur. once we become a public company, we will be required to comply with the requirements of section404 of the sarbanes-oxley act of 2002 as of december31, 2008 and subsequent fiscal years. in the event that we have not adequately remedied these material weaknesses, and if we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.if we do not adequately manage and evolve our financial reporting and managerial systems and processes, our operating results and financial condition may be harmed. our ability to successfully implement our business plan and comply with regulations applicable to being a public reporting company requires an effective planning and management process. we expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis. in addition, the successful enhancement of our operational and financial systems, procedures and controls will result in higher general and administrative costs in future periods, and may adversely impact our operating results and financial condition. in connection with our implementation, in the third quarter of 2006, of more stringent controls related to contracts for providing customer support, we discovered that certain end users in china maintained that they were entitled to company-provided support, while our contracts with these customers did not provide for customer support. in response, the audit committee of our board of directors conducted an independent investigation of the matter, employing independent counsel and an independent accounting firm. the investigation, which was completed in december 2006, found numerous instances in which resellers of our product applications in china, with the understanding and approval of our china personnel, agreed to provide technical support, extended warranty terms and potentially other undefined terms without proper documentation and without communicating these arrangements to our legal and finance departments. as a result, we have deferred approximately $5.1 million in revenue as of december31, 2006 from customers in china, which will be recognized in future periods if we satisfy all of the elements of our revenue recognition criteria. our controls previously in place did not prevent these occurrences and we have therefore implemented a number of additional controls and remedial actions to ensure the appropriate accounting of future transactions and control over contracts with end users in china. in the event that we have not adequately implemented these additional controls and remedial actions, additional material weaknesses could be identified and could cause investors to lose confidence in our financial reporting.we may not accurately anticipate the timing of the market needs for our products and develop such products at the appropriate times, which could harm our operating results and financial condition. accurately forecasting and meeting our customers requirements is critical to the success of our business. forecasting to meet customers needs is particularly difficult in connection with newer products and products under development. our ability to meet customer demand depends on our ability to configure our product applications to the complex architecture that our customers have developed, the availability of components and other materials and the ability of our contract manufacturers to scale their production of our products. our ability to meet customer requirements depends on our ability to obtain sufficient volumes of these components and materials in a timely fashion. if we fail to meet customers supply expectations, our net revenues will be adversely affected, and we will likely lose business. in addition, our priorities for future product development are based on our expectations of how the market for video, voice and data services will continue to develop in the united states and in international markets. if the market for such services develops more rapidly than we 11 anticipate, then our product development efforts may be behind, which may result in our being unable to recoup our capital spent on product development as a result of a missed market opportunity. conversely, if the market develops more slowly than we anticipate, we may find that we have expended significant capital on product development prior to our being able to generate any revenues for those products. if we are unable to accurately time our product introductions to meet market demand, it could have a material adverse impact on our operating results and financial condition. in addition, if actual orders are materially lower than the indications we receive from our customers, our ability to manage inventory and expenses will also be harmed. if we enter into purchase commitments to acquire components and materials, or expend resources to manufacture products, and those products are not purchased by our customers when expected, our business and operating results could suffer.we need to develop and introduce new and enhanced products in a timely manner to remain competitive, and our product development efforts require substantial research and development expense. the markets in which we compete are characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. to compete successfully, we must design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet the cost expectations of our customers. our product development efforts require substantial research and development expense. research and development expense in the year ended december31, 2006 was $37.2million, in the year ended december31, 2005 was $30.7million and in the year ended december31, 2004 was $21.6million. there can be no assurance that we will achieve an acceptable return on our research and development efforts. we are currently developing a modular cable modem termination system, or m-cmts, that we believe will be important for our future revenue growth and operating results. if we fail to deliver our m-cmts product to market in a timely and cost-effective manner, or if our m-cmts product fails to operate with all the functionality our customers expect, our future operating results would be harmed. likewise, new technologies, standards and formats are being adopted by our customers. while we are in the process of developing products based on many of these new formats in order to remain competitive, we do not have such products at this time and cannot be certain when, if at all, we will have products in support of such new formats.our future growth depends on market acceptance of several emerging video, voice and data services, on the adoption of new network architectures and technologies and on several other industry trends. future demand for our products will depend significantly on the growing market acceptance of several emerging video, voice and data services, including high-speed data services; hdtv; addressable advertising; video delivered over telephone company networks; and voip. the effective delivery of these services will depend on service providers developing and building new network architectures to deliver them. if the introduction or adoption of these services or the deployment of these networks is not as widespread or as rapid as we or our customers expect, our revenue growth will be limited. furthermore, we expect the extent and nature of regulatory attitudes towards issues such as competition among service providers, access by third parties to networks of other service providers and new services such as voip to impact our customers purchasing decisions. if service providers do not pursue the opportunity to offer integrated video, voice and data services as aggressively as we expect, our revenue growth would be limited.the markets in which we operate are intensely competitive, and many of our competitors are larger, more established and better capitalized than we are. the markets for selling network-based hardware and software products to service providers are extremely competitive and have been characterized by rapid technological change. in the cmts market, we compete 12 principally with cisco systems, motorola and arris. in the video market, we compete broadly with system suppliers including harmonic, motorola, scientific atlanta (a division of cisco systems), seachange international, tandberg television (which recently announced that it will be acquired by arris), terayon communication systems and a number of smaller companies. we may not be able to compete successfully in the future, which may harm our business. many of our competitors are substantially larger and have greater financial, technical, marketing and other resources than us. given their capital resources, many of these large organizations are in a better position to withstand any significant reduction in capital spending by customers in these markets. they often have broader product lines and market focus and are not as susceptible to downturns in a particular market. in addition, many of our competitors have been in operation much longer than we have and therefore have more long-standing and established relationships with domestic and foreign service providers. if any of our competitors products or technologies were to become the industry standard, our business would also be seriously harmed. if our competitors are successful in bringing their products to market earlier, or if their products are more technologically capable than ours, then our sales could be materially adversely affected. recently, we have seen rapid consolidation among our competitors, such as ciscos acquisition of scientific atlanta and purchases of vod solutions by each of cisco, harmonic and motorola. in addition, some of our competitors have entered into strategic relationships with one another to offer a more comprehensive solution than would be available individually. we expect this trend to continue as companies attempt to strengthen or maintain their market positions in the evolving industry for video. many of the companies driving this consolidation trend have significantly greater financial, technical and other resources than we do, and are much better positioned than we are to offer complementary products and technologies. these combined companies may offer more compelling product offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete while sustaining acceptable gross margins. finally, continued industry consolidation may impact customers perceptions of the viability of smaller companies, which may affect their willingness to purchase products from us. these competitive pressures could harm our business, operating results and financial condition.in the event that certain of our competitors integrate products performing functions similar to our products into their existing network infrastructure offerings, our existing and potential customers may decide against using our products in their networks, which would harm our business. other providers of network-based hardware and software products are offering or announcing functionality aimed at solving similar problems addressed by our products. for example, several vendors have recently announced their intention to develop a switched broadcast product application. the inclusion of, or the announcement of the intent to include, functionality perceived to be similar to our product offerings in our competitors products that have been accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products. furthermore, even if the functionality offered by other network infrastructure providers is more limited than our products, a significant number of customers may elect to accept such limited functionality in lieu of adding components from a different vendor. many of our existing and potential customers have invested substantial personnel and financial resources to design and operate their networks and have mature relationships with other providers of network infrastructure products, which may make them reluctant to add new components to their networks, particularly from new vendors. in addition, our customers other vendors with a broader product offering may be able to offer pricing or other concessions that we are not able to match because we currently offer a more modest suite of products and have fewer resources. if our existing or potential customers are reluctant to add network infrastructure from new vendors or otherwise decide to work with their existing vendors, our business, operating results and financial condition will be adversely affected.we need to develop additional distribution channels to market and sell our products. the majority of our sales to date have been direct sales to large cable operators in north america. our video products have been traditionally sold to large cable operators with recent sales to telephone companies. we have 13 not focused on smaller service providers and have had only limited access to service providers in certain international markets, including asia and europe. although we intend to establish strategic relationships with leading distributors worldwide in an attempt to reach new customers, we may not succeed in establishing these relationships. even if we do establish these relationships, the distributors may not succeed in marketing our products to their customers. some of our competitors have established long-standing relationships with cable operators and telephone companies that may limit our and our distributors ability to sell our products to those customers. even if we were to sell our products to those customers, it would likely not be based on long-term commitments, and those customers would be able to terminate their relationships with us at any time without significant penalties.we depend on a limited number of third parties to manufacture, assemble and supply our products. we obtain many components and modules necessary for the manufacture or integration of our products from a sole supplier or a limited group of suppliers, with whom we do not generally maintain long-term agreements. our reliance on sole or limited suppliers involves several risks, including the inability to obtain an adequate supply of required components or modules and reduced control over pricing, quality and timely delivery of components. for example, we depend exclusively on broadcom for one of the chipsets in our cmts product. our ability to deliver our products on a timely basis to our customers would be materially adversely impacted if we needed to find alternative replacements for the chipsets, central processing units or power supplies that we use in our products. significant time and effort would be required to locate new vendors for these alternative components, if alternatives are even available to us. in addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantity requirements and delivery schedules. in addition, increased demand by third parties for the components we use in our products may lead to decreased availability and higher prices for those components, since we carry little inventory of our products and product components. as a result, we may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner, which would-0.11605018.731406.82218.586139100000176.510True2007
936.0123.0NaN271.269114ENFIELD13.1000NaN52.939972.18FalseNYSEFalseTrueManufacturing -- Machinery, Trucks, Planes, Off Furn, Paper, Com PrintingRubber and Plastic ProductsManufacturing, Energy, and Utilities6378.0123000000.0STR Holdings Inc0.372381NaNCredit Suisse\nGoldman Sachs & Co2154.4722.9899.0073.010.00.571429True6378.004.2862864.50059.00130.004risk factors an investment in our common stock involves a high degree of risk. you should carefully consider the following risks, as well as the other information contained in this prospectus, before making an investment in our company. if any of the following risks actually occurs, our business, results of operations or financial condition may be adversely affected. in such an event, the trading price of our common stock could decline and you could lose part or all of your investment. risks related to our solar businessif demand for solar energy in general and solar modules in particular does not continue to develop or takes longer to develop than we anticipate, sales in our solar business may not grow or may decline, which would negatively affect our financial condition and results of operations. we expect that a significant amount of the growth in our overall business will come from the sale of encapsulants by our solar business. because our encapsulants are used in the production of solar modules, our financial condition and results of operations and future growth are tied to a significant extent to the overall demand for solar energy and solar modules. the solar energy market is at a relatively early stage of development and the extent to which solar modules will be widely adopted is uncertain. many factors may affect the viability and widespread adoption of solar energy technology and demand for solar modules, and in turn, our encapsulants, including: cost-effectiveness of solar modules compared to conventional and non-solar renewable energy sources and products; performance and reliability of solar modules compared to conventional and non-solar renewable energy sources and products; availability and amount of government subsidies and incentives to support the development and deployment of solar energy technology; rate of adoption of solar energy and other renewable energy generation technologies, such as wind, geothermal and biomass; seasonal fluctuations related to economic incentives and weather patterns; fluctuations in economic and market conditions that affect the viability of conventional and non-solar renewable energy sources, such as increases or decreases in the prices of fossil fuels and corn or other biomass materials; the current worldwide economic recession as well as volatility and disruption in the credit markets, which may continue to slow the growth of the solar industry, may continue to cause our customers to experience a reduction in demand for their products and related financial difficulties and may continue to adversely impact our solar business; fluctuations in capital expenditures by end users of solar modules, which tend to decrease when the overall economy slows down; the extent to which the electric power and broader energy industries are deregulated to permit broader adoption of solar electricity generation; and the cost and availability of polysilicon and other key raw materials for the production of solar modules. for example, in the first six months of 2009, we experienced a decline in our solar business mainly due to decreased global demand for solar energy as a result of legislative changes, such as the cap in feed-in tariffs in spain implemented in 2008, the ongoing global recession and the ongoing worldwide credit crisis. if demand for solar energy and solar modules fails to develop sufficiently, demand for our customers' products as well as demand for our encapsulants will decrease, and we may not be able to grow our business or solar net sales and our financial condition and results of operations will be harmed.a significant reduction or elimination of government subsidies and economic incentives or a change in government policies that promote the use of solar energy could have a material adverse effect on our business and prospects. demand for our encapsulants depends on the continued adoption of solar energy and the resultant demand for solar modules. demand for our products depends, in large part, on government incentives aimed to promote greater use of solar energy. in many countries in which solar modules are sold, solar energy would not be commercially viable without government incentives. this is because the cost of generating electricity from solar energy currently exceeds, and we believe will continue to exceed for the foreseeable future, the costs of generating electricity from conventional energy sources. the scope of government incentives for solar energy depends, to a large extent, on political and policy developments relating to environmental and energy concerns in a given country that are subject to change, which could lead to a significant reduction in, or a discontinuation of, the support for renewable energy in such country. federal, state and local governmental bodies in many of the target markets for our solar business, including germany, italy, spain, the united states, france, japan and south korea, have provided subsidies and economic incentives in the form of feed-in tariffs, rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of solar energy products to promote the use of solar energy and to reduce dependency on other forms of energy. these government economic incentives could be reduced or eliminated earlier than anticipated. for example, in june2008, the german parliament adopted new legislation that will decrease the feed-in tariff for solar energy between 8% and 10% in 2010 and 9% annually thereafter. also, in september 2008, the spanish parliament adopted new legislation that will decrease the feed-in tariff for solar energy by approximately 27% and capped its subsidized pv installations at 500 mw for 2009. moreover, electric utility companies, or generators of electricity from fossil fuels or other renewable energy sources, could also lobby for changes in the relevant legislation in their markets to protect their revenue streams. reduced growth in or the reduction, elimination or expiration of government subsidies and economic incentives for solar energy, especially those in our target markets, could cause our solar net sales to decline and harm our business.our solar business is dependent on a limited number of customers, which may cause significant fluctuations or result in declines in our solar net sales. the solar module industry is relatively concentrated. as a result, we sell substantially all of our encapsulants to a limited number of solar module manufacturers. we expect that our results of operations will, for the foreseeable future, continue to depend on the sale of encapsulants to a relatively small number of customers. sales to first solar accounted for 31.0% and 19.1% of our solar net sales in the six months ended june30, 2009 and the year ended december31, 2008, respectively. in addition, the top five customers in our solar segment accounted for approximately 63.6% and 47.0% of our solar net sales in the six months ended june30, 2009 and the year ended december31, 2008, respectively. furthermore, participants in the solar industry, including our customers, are experiencing pressure to reduce their costs. because we are part of the overall supply chain to our customers, any cost pressures experienced by them may affect our business and results of operations. our customers may not continue to generate significant solar net sales for us. conversely, we may be unable to meet the production demands of our customers or maintain these customer relationships. also, new entrants into the solar module manufacturing industry, primarily from china, could negatively impact the demand for, and pricing of, our customers' products, which could reduce the demand for our encapsulants. we believe our european customers have lost market share to low-cost module manufacturers, primarily from china, that continue to penetrate the european solar market and whom we do not sell encapsulants to. we have lost market share in the european market due to emerging low-cost solar module manufacturers, primarily from china, and if we are not able to supply encapsulants to these new entrants in the future, we could lose further market share and also face competition from new encapsulant manufacturers. in addition, a significant portion of our outstanding accounts receivable is derived from sales to a limited number of customers. the accounts receivable from our top five solar customers with the largest receivable balances represented 44.8% and 34.6% of our accounts receivable balance as of june30, 2009 and december31, 2008, respectively. moreover, many solar companies are facing and may continue to face significant liquidity and capital expenditure requirements, and as a result, our customers may have trouble making payments owed to us, which could affect our business, financial condition and results of operations. any one of the following events may cause material fluctuations or declines in our solar net sales and have a material adverse effect on our business, financial condition and results of operations: reduction, postponement or cancellation of orders from one or more of our significant customers; reduction in the price one or more significant solar customers are willing to pay for our encapsulants; selection by one or more solar customers of products competitive with our encapsulants; loss of one or more significant solar customers and failure to obtain additional or replacement customers; and failure of any of our significant solar customers to make timely payment for products.our solar business's growth is dependent upon the growth of our key solar customers and our ability to keep pace with our customers' growth. in addition to relying on a small number of customers, we believe we were the primary supplier to each of our top 10 solar customers in the first six months of 2009. the future growth and success in our solar business depends on the ability of such customers to grow their businesses and our ability to meet any such growth, principally through the addition of manufacturing capacity. if our solar customers do not increase production of solar modules, there will be no corresponding increase in encapsulant orders. alternatively, in the event such customers grow their businesses, we may not be able to meet their increased demands, which would require such customers to find alternative sources for encapsulants. in addition, it is possible that customers for which we are the exclusive supplier of encapsulants will seek to qualify and establish a secondary supplier of encapsulants, which would reduce our share with such customers and could increase that customer's pricing leverage. if our solar customers do not grow their businesses or they find alternative sources for encapsulants to meet their demands, it could limit our ability to grow our business and increase our solar net sales.technological changes in the solar energy industry or our failure to develop and introduce or integrate new technologies could render our encapsulants uncompetitive or obsolete, which would adversely affect our business. the solar energy market is rapidly evolving and competitive and is characterized by continually changing technology requiring continuous improvements in solar modules to increase efficiency and power output and improve aesthetics. this requires us and our customers to continuously invest significant financial resources to develop new solar module technology and enhance existing solar modules to keep pace with evolving industry standards and changing customer requirements and to compete effectively in the future. our failure to further refine our encapsulant technology and develop and introduce new or enhanced encapsulants or other products, or our competitors' development of products and technologies that perform better or are more cost effective than our products, could cause our encapsulants to become uncompetitive or obsolete, which would adversely affect our business, financial condition and results of operations. product development activities are inherently uncertain, and we could encounter difficulties in commercializing new technologies. as a result, our product development expenditures in our solar business may not produce corresponding benefits. moreover, we produce a component utilized in the manufacturing of solar modules. new solar technologies may emerge or existing technologies may gain market share that do not require encapsulants as we produce them, or at all. such changes could result in decreased demand for our encapsulants or render them obsolete, which would adversely affect our business, financial condition and results of operations.we rely upon trade secrets and contractual restrictions, and not patents, to protect our proprietary rights. failure to protect our intellectual property rights may undermine our competitive position and protecting our rights or defending against third-party allegations of infringement may be costly. protection of proprietary processes, methods, documentation and other technology is critical to our business. failure to protect, monitor and control the use of our existing intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. we rely on trade secrets, trademarks, copyrights and contractual restrictions to protect our intellectual property rights and currently do not hold any patents related to our solar business. however, the measures we take to protect our trade secrets and other intellectual property rights may be insufficient. while we enter into confidentiality agreements with our solar employees and third parties to protect our intellectual property rights, such confidentiality provisions related to our trade secrets could be breached and may not provide meaningful protection for our trade secrets. also, others may independently develop technologies or products that are similar or identical to ours. in such case, our trade secrets would not prevent third parties from competing with us. third parties or employees may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could harm our business and operating results. policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available. we are currently in litigation with a former employee, jamesp. galica, in our solar business and his current employer, jps elastomerics corp., for the misappropriation and theft of our trade secrets. in august 2008, the jury determined that the technology for our polymeric sheeting product line is a trade secret. the jury also determined that our former employee and his current employer had not misappropriated our trade secrets. we have not decided if we will appeal the jury's determination. the jury also found that our former employee had breached his confidentiality agreement with us. subsequently, the judge determined that jps and galica had violated the massachusetts unfair and deceptive trade practices act, finding that the technology for our polymeric sheeting product is a trade secret and that jps and galica had misappropriated our trade secrets. the judge awarded us compensatory and punitive damages, attorneys' fees and costs and issued a temporary injunction preventing jps from manufacturing, marketing or selling the competing products, which are substantially similar to some of our encapsulants. the final amount of damages to be awarded to us, as well as the scope of a permanent injunction, is still pending before the court and will be determined by the presiding judge. jps has filed a motion for reconsideration of the court's decision that jps and galica had violated the massachusetts unfair and deceptive trade practices act. final judgment will not be entered until these pending matters are resolved. the court has ordered each party to brief the remaining issues. upon entry of final judgment, jps will have the right to appeal the judge's ruling, and we will have the right to appeal the jury's verdict. if jps or galica is successful on the appeals from both the jury's verdict and the judge's rulings, the result may be a new trial or a final determination that jps may compete with us by continuing to sell a product that is substantially similar to some of our encapsulants. jps may also be allowed to compete with us on some encapsulant products based on the court's ruling on the scope and duration of the permanent injunction. even if we are ultimately successful, this lawsuit and any future lawsuits to protect our intellectual property rights or defend against third-party infringement claims may be costly and may divert management attention and other resources away from our business. for further information regarding the litigation with our former employee, see "businesslegal proceedingsgalica/jps."we face competition in our solar business from other companies producing encapsulants for solar modules. the market for encapsulants is highly competitive and continually evolving. we compete with a number of encapsulant manufacturers, some of which are large, global companies with substantial financial, manufacturing and logistics resources and strong customer relationships. if we fail to attract and retain customers for our current and future products, we will be unable to increase our revenues and market share. our primary encapsulant competitors include bridgestone corporation, etimex primary packaging gmbh and mitsui chemicals, inc. we also expect to compete with new entrants to the encapsulant market, including those that may offer more advanced technological solutions or that have greater financial resources than we do. further, as the china solar market matures, we expect other encapsulant providers from china and the greater asian markets will compete with us. our competitors may develop and produce or may be currently producing encapsulants that offer advantages over our products. a widespread adoption of any of these technologies could result in a rapid decline in our position in the encapsulant market and our revenues and adversely affect our margins.our failure to build and operate new manufacturing facilities and increase production capacity at our existing facilities to meet our customers' requirements could harm our business and damage our customer relationships in the event demand for encapsulants increases. conversely, expanding our production in times of overcapacity could have an adverse impact on our results of operations. prior to the fourth quarter of 2008, our manufacturing facilities generally operated at full production capacity, which constrained our ability to meet increased demand from our customers. the future success of our solar business depends, in part, on our ability to increase production capacity to satisfy any increased demand from our customers. we may be unable to expand our solar business, satisfy customer requirements, maintain our competitive position and improve profitability if we are unable to build and operate new manufacturing facilities and increase production capacity at our existing facilities to meet any increased demand for our solar products. for example, if there are delays in our new malaysian facility achieving target yields and output, we will not meet our target for adding capacity, which would limit our ability to increase encapsulant sales and result in lower than expected solar net sales and higher than expected costs and expenses. moreover, we may experience delays in receiving equipment and be unable to meet any increases in customer demand. failure to satisfy customer demand may result in a loss of market share to competitors and may damage our relationships with key customers. in addition, due to the lead time required to produce the equipment used in our encapsulant manufacturing process, it can take up to a year to obtain new machines after they are ordered. accordingly, we are required to order production equipment well in advance of expanding our facilities or opening new facilities and in advance of accepting additional customer orders. if such facilities are not expanded or completed on a timely basis or if anticipated customer orders do not materialize, we may not be able to generate sufficient solar net sales to offset the costs of new production equipment, which could have an adverse impact on our results of operations. furthermore, we rely on longer-term forecasts from our solar customers to plan our capital expenditures. if these forecasts prove to be inaccurate, either we may have spent too much on capacity growth, which could require us to consolidate facilities, in which case our financial results would be adversely affected, or we may have spent too little on capital expenditures, in which case we may be unable to satisfy customer demand, which could adversely affect our business. furthermore, our ability to establish and operate new manufacturing facilities and expand production capacity is subject to significant risks and uncertainties, including: restrictions in the agreements governing our indebtedness that restrict the amount of capital that can be spent on manufacturing facilities; inability to raise additional funds or generate sufficient cash flow from operations to purchase raw material inventory and equipment or to build additional manufacturing facilities; delays and cost overruns as a result of a number of factors, many of which are beyond our control, such as increases in raw material prices and long lead times or delays with equipment vendors; delays or denials of required approvals by relevant government authorities; diversion of significant management attention and other resources; inability to hire qualified personnel; and failure to execute our expansion plan effectively. if we are unable to establish or successfully operate additional manufacturing facilities or to increase production capacity at our existing facilities, as a result of the risks described above or otherwise, we may not be able to expand our business as planned and our solar net sales may be lower than expected. alternatively, if we build additional manufacturing facilities or increase production capacity at our existing facilities, we may not be able to generate sufficient customer demand for our encapsulants to support the increased production levels, which would adversely affect our business and operating margins.our solar business is exposed to risks related to running our facilities at full production capacity from time to time that could result in decreased solar net sales and affect our ability to grow our business in future periods. prior to the fourth quarter of 2008, our manufacturing facilities generally operated at full production capacity. if any of our current or future production lines or equipment were to experience any problems or downtime, such as in 2005 when one of our plants was without electricity for five days following a hurricane, we may not be able to shift production to new lines and may not be able to meet our production targets, which would result in decreased solar net sales and adversely affect our customer relationships. as a result, our per-unit manufacturing costs would increase, we would be unable to increase sales as planned and our earnings would likely be negatively impacted. in addition, when our encapsulant production lines are running at full capacity, they are generally used solely to meet current customers' orders. as such, there is very limited production line availability to test new technologies or further refine existing technologies that are important for keeping pace with evolving industry standards and changing customer requirements and competing effectively in the future. limitations in our ability to test new products or enhancements to our existing products could cause our encapsulants to become uncompetitive or obsolete, which would adversely affect our business.we may be subject to claims that we have infringed, misappropriated or otherwise violated the patent or other intellectual property rights of a third party. the outcome of any such claims is uncertain and any unfavorable result could adversely affect our business, financial condition and results of operations. we may be subject to claims by third parties that we have infringed, misappropriated or otherwise violated their intellectual property rights. these claims may be costly to defend, and we ultimately may not be successful. an adverse determination in any such litigation could subject us to significant liability to third parties (potentially including treble damages), require us to seek licenses from third parties (which may not be available on reasonable terms, or at all), make substantial one-time or ongoing royalty payments, redesign our products or subject us to temporary or permanent injunctions prohibiting the manufacture and sale of our products, the use of our technologies or the conduct of our business. protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation. in addition, we may have no insurance coverage in connection with such litigation and may have to bear all costs arising from any such litigation to the extent we are unable to recover them from other parties. any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.we generally operate on a purchase order basis with our solar customers, and their ability to cancel, reduce, or postpone orders could reduce our solar net sales and increase our costs. sales to our solar customers are typically made through non-exclusive, short-term purchase order arrangements that specify prices and delivery parameters. the timing of placing these orders and the amounts of these orders are at our customers' discretion. customers may cancel, reduce or postpone purchase orders with us prior to production on relatively short notice. if customers cancel, reduce or postpone existing orders or fail to make anticipated orders, it could result in the delay or loss of anticipated sales, which could lead to excess inventory and unabsorbed overhead costs. because our encapsulants have a limited shelf life from the time they are produced until they are incorporated into a solar module, we may be required to sell any excess inventory at a reduced price, or we may not be able to sell it at all and incur an inventory write-off, which could reduce our solar net sales and increase our costs. in the first six months of 2009, we experienced postponements and cancellations in orders and, as a result, incurred approximately $1.0million of inventory write-offs.we may be unable to manage the expansion of our solar operations effectively. we expect to expand our existing facilities and add new facilities to meet future demand for encapsulants. we recently completed expansions in our facilities in connecticut and spain. the production line qualification on our malaysian facility has been completed, and we began shipping production quantities of encapsulants from that facility in the third quarter of2009. to manage the potential growth of our operations, we will be required to improve operational and financial systems, procedures and controls, increase manufacturing capacity and output and expand, train and manage our growing employee base. furthermore, management will be required to maintain and expand our relationships with our customers, suppliers and other third parties. our solar business's current and planned operations, personnel, systems, internal procedures and controls may not be adequate to support our future growth. if we are unable to manage the growth of our solar business effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.our dependence on a limited number of third-party suppliers for raw materials for our encapsulants and other significant materials used in our process could prevent us from timely delivering encapsulants to our customers in the required quantities, which could result in order cancellations and decreased revenues. we purchase resin and paper liner, the two main components used in our manufacturing process, from a limited number of third-party suppliers. if we fail to develop or maintain our relationships with these suppliers or our other suppliers, or if the suppliers' facilities are affected by events beyond our control, we may be unable to manufacture our encapsulants or our encapsulants may be available only for customers in lesser quantities, at a higher cost or after a long delay. we may be unable to pass along any price increases relating to materials costs to our customers, in which case our margins could be reduced. in addition, we do not maintain long-term supply contracts with our suppliers. our inventory of raw materials for our encapsulants, including back-up supplies of resin, may not be sufficient in the event of a supply disruption. in 2005, we encountered a supply disruption when one of our resin suppliers had its facilities damaged by a hurricane, and another supplier had a reactor fire at the same time. this forced us to use our back-up supplies of resin. the failure of a supplier to supply materials and components, or a supplier's failure to supply materials that meet our quality, quantity and cost requirements in a timely manner, could impair our ability to manufacture our products to specifications, particularly if we are unable to obtain these materials and components from alternative sources on a timely basis or on commercially reasonable terms. if we are forced to change suppliers, our customers may require us to undertake testing to ensure that our encapsulants meet the customer's specifications.our solar gross margins and profitability may be adversely affected by rising commodity costs. we are dependent on certain raw and other materials, particularly resin and paper, for the manufacture of our encapsulants. in addition, the cost of equipment used to manufacture our encapsulants is affected by steel prices. the prices for resin, paper and steel have been volatile over the past few years and could increase. if the prices for the commodities and equipment we use in our solar business increase, our gross margins and results of operations may be adversely affected.as a supplier to solar module manufacturers, disruptions in any other component of the supply chain to solar module manufacturers may adversely affect our customers and consequently limit the growth of our business and revenue. we supply a component to solar module manufacturers. as such, if there are disruptions in any other area of the supply chain for solar module manufacturers, it could affect the overall demand for our encapsulants. for example, the increased demand for polysilicon due to the rapid growth of the solar energy and computer industries and the significant lead time required for building additional capacity for polysilicon production led to an industry-wide shortage of polysilicon from 2005 through 2008, which is an essential raw material in the production of most of the solar modules produced by many of our customers. this and other disruptions to the supply chain may force our customers to reduce production, which in turn would decrease customer demand for our encapsulants and could adversely affect our solar net sales. in addition, reduced orders for our encapsulants could result in underutilization of our production facilities and cause an increase of our marginal production cost. in 2009, we experienced postponements and cancellations in orders and, as a result, incurred approximately $1.0million of inventory write-offs.the sales cycle for our encapsulants can be lengthy, which could result in uncertainty and delays in generating solar net sales. the integration and testing of our encapsulants with prospective customers' solar modules or enhancements to existing customers' solar modules requires a substantial amount of time and resources. a solar customer may need up to one year to test, evaluate and adopt our encapsulants and qualify a new solar module, before ordering our encapsulants. our solar customers then need additional time to begin volume production of solar modules that incorporate our encapsulants. as a result, the complete sales cycle for our solar business can be lengthy. we may experience a significant delay between the time we increase our expenditures for product development, sales and marketin0.03559429.751079.60645.860123000000264.945False2009

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33204.0160.02000.0NaNHACKENSACK16.0000NaN99.9511119.86FalseNASDQTrueFalseTelephone and Television TransmissionCommunicationBusiness Equipment, Telephone and Television Transmission77698.0160000000.0GoAmerica IncNaN2250000.0Bear Stearns & Co Inc4940.61NaN12.00257.016.000.461538False77698.005.9209608.001008.001148.024RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risks together with the other information contained in this prospectus before deciding to buy our common stock. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results could be significantly and adversely affected. If that happens, the price of our common stock could decline, and you could lose all or part of your investment. Risks Particular To GoAmerica We have historically incurred losses and these losses will increase in the foreseeable futureWe have never earned a profit. We had net losses of $1.0 million, $2.6 million and $11.5 million for the years ended December 31, 1997, 1998 and 1999, respectively. Since our inception, we have invested significant capital to build our wireless network operations and customer support centers as well as our customized billing system. Recently, we have invested additional capital in the development of our software application Go.Web. We plan to acquire and implement new operational and financial systems, continue to invest in our network operations and customer support centers, and expand our sales and marketing efforts. We also provide and expect to continue to provide mobile devices made by third parties to our customers at prices below our costs for such devices. In addition, our costs of subscriber revenue, consisting principally of our purchase of wireless airtime from network carriers, have historically exceeded our subscriber revenue and we expect such negative margins to continue until at least March 2000. Further, we have experienced and expect to continue to experience negative overall gross margins, which consist of margins on our subscriber revenues, equipment sales and other revenue. As a result, we have incurred operating losses since our inception and expect to continue to incur increasing operating losses for at least the next several quarters. Therefore, we will need to generate significant revenue to become profitable and sustain profitability on a quarterly or annual basisWe may not achieve or sustain our revenue or profit goals, and our ability to do so depends on the factors specified elsewhere in "Risk Factors" as well as on a number of factors outside of our control, including the extent to which: . our competitors announce and develop, or lower the prices of, competing services; . wireless network carriers, data providers and manufacturers of mobile devices dedicate resources to selling our services; and . prices for our services decrease as a result of reduced demand or competitive pressuresAs a result, we may not be able to increase revenue or achieve profitability on a quarterly or annual basis. We have only a limited operating history, which makes it difficult to evaluate an investment in our common stock We have only a limited operating history on which you can evaluate our business, financial condition and operating results. We face a number of risks encountered by early stage technology companies that participate in new technology markets, including our ability to: . manage our dependence on wireless data services which have only limited market acceptance to date; . expand our marketing, sales, engineering and support organizations, as well as our distribution channels; . negotiate and maintain favorable usage rates with telecommunications carriers; . retain and expand our subscriber base at profitable rates; . recoup our expenses associated with the wireless devices we resell to subscribers; 6 . manage expanding operations, including our ability to expand our systems if our subscriber base grows substantially; . attract and retain management and technical personnel; and . anticipate and respond to market competition and changes in technologies such as wireless data protocols and wireless devicesWe may not be successful in addressing or mitigating these risks and uncertainties, and if we are not successful our business could be significantly and adversely affected. To generate increased revenue we will have to increase substantially the number of our subscribers, which may be difficult to accomplish We will have to increase substantially the number of our subscribers in order to achieve our business plan. In addition to increasing our subscriber base, we will have to limit our churn, or the number of subscribers who deactivate our service. Adding new subscribers will depend to a large extent on the success of our direct and indirect marketing campaigns, and there can be no assurance that they will be successful. Limiting our churn rate will require that we provide our subscribers with a favorable experience in using our wireless service. Our subscribers' experience may be unsatisfactory to the extent that our service malfunctions or our customer care efforts, including our Web site and 800 number customer service efforts, do not meet or exceed subscriber expectations. In addition, factors beyond our control, such as technological limitations of certain of the current generation of wireless devices, which may cause our subscribers' experience with our service to not meet their expectations, could increase our churn rate and adversely affect our revenues. Because a significant minority of our subscribers have low or no usage rates for our services, our churn rates could increase in the future. We need to improve our systems to monitor our wireless airtime costs more effectivelyWe seek to reduce our wireless airtime costs by periodically matching our subscribers airtime usage needs to the most appropriate, lowest cost wireless carrier plans. It is possible for a small number of subscribers, if we do not assign them to the proper airtime pricing plan, to significantly increase our costs. The current systems that we use to monitor the airtime charges that we incur from our wireless carriers do not permit us to timely and effectively respond to changes in volume and geographic location of subscriber usage, which directly impact our costs of subscriber revenue. We currently use a manual system to track such costs and monitor wireless plan usage. We cannot assure you that we will be able to acquire or develop automated control systems or, if implemented, that our systems will be able to monitor all subscriber usage or improve our gross margins. We have experienced and may continue to experience negative gross margins on our subscriber revenueWe intend to pass through to our subscribers all the airtime charges that we incur from our wireless carriers; however, we have not always been and will not always be able to pass through such charges because the pricing plans offered to us by our wireless carriers and to which we assign our subscribers may not allow us to always cover our subscriber costs. For example, many of our subscribers have contracted for our Go.Unlimited Plan, which provides for unlimited nationwide wireless Internet service for a fixed monthly fee. If we assign those subscribers to a carrier plan that charges us an increasing fee as subscriber usage increases, then as subscriber usage and our related airtime costs increase, our margins on subscriber revenues would decrease and may become negative. Our airtime costs also increase substantially when subscribers use our services outside of their pre-determined geographic area, which results in roaming charges to us by the carriers that we do not pass on to our subscribers. We do not have and may not be able to develop the automated systems necessary to monitor our subscribers' usage and roaming patterns and quickly switch our subscribers to a more appropriate, lower cost airtime plan. In addition, while we continually seek to negotiate better pricing of wireless airtime plans with our carriers, we cannot assure you that we will be successful in that regard. 7 We subsidize the mobile devices that we resell which results in negative gross margins on our equipment revenueIn order to facilitate the sale of our wireless Internet services, the sales prices of the mobile devices manufactured by third parties that we sell to our subscribers are generally below our costs for such devices. Additionally, we have also provided many of our resellers and marketing partners with complimentary mobile devices and GoAmerica service during a trial period in order to facilitate additional sales of our services. As a result, we have experienced, and expect to continue to experience, negative gross margins on the mobile devices that we resell. We have limited resources and we may be unable to support effectively our anticipated growth in operationsWe have begun aggressively expanding our operations in anticipation of an increase in the number of our subscribers. The number of our employees increased from 23 on December 31, 1998 to 49 on December 31, 1999. We intend to use a portion of the net proceeds of this offering to hire a significant number of additional employees. We also intend to use a portion of the net proceeds from this offering to acquire a state-of-the-art accounting and business process software package to replace our current manual systems which must be updated. Additionally, we must continue to develop and expand our systems and operations as the number of subscribers and the amount of information they wish to receive, as well as the number of services we offer, increases. This development and expansion has placed, and we expect it to continue to place, significant strain on our managerial, operational and financial resources. We may be unable to develop and expand our systems and operations for one or more of the following reasons: . we may not be able to locate or hire at reasonable compensation rates qualified engineers and other employees necessary to expand our capacity on a timely basis; . we may not be able to obtain the hardware necessary to expand the subscriber capacity of our systems on a timely basis; . we may not be able to expand our customer service, billing and other related support systems; and . we may not be able to obtain sufficient additional capacity from wireless carriers on a timely basisIf we cannot manage our growth effectively, our business and operating results will suffer. Additionally, any failure on our part to develop and maintain our wireless data services if we experience rapid growth could significantly adversely affect our reputation and brand name which could reduce demand for our services and adversely affect our business, financial condition and operating results. Our business prospects depend in part on our ability to maintain and improve our services as well as to develop new servicesWe believe that our business prospects depend in part on our ability to maintain and improve our current services and to develop new services on a timely basis. Our services will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. If we do not respond effectively and on a timely basis to rapid technological change, our business could sufferThe wireless and data communications industries are characterized by rapidly changing technologies, industry standards, customer needs and competition, as well as by frequent new product and service 8 introductions. Our services are integrated with wireless handheld devices and the computer systems of our corporate customers. Our services must also be compatible with the data networks of wireless carriers. We must respond to technological changes affecting both our customers and suppliers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new services that respond to technological changes, evolving industry standards or changing customer requirements. Our success will depend, in part, on our ability to accomplish all the following in a timely and cost-effective manner: . effectively use and integrate new technologies; . continue to develop our technical expertise; . enhance our wireless data, engineering and system design services; . develop applications for new wireless networks and services; . develop services that meet changing customer needs; . advertise and market our services; and . influence and respond to emerging industry standards and other changes. We depend upon wireless carriers' networks. If we do not have continued access to sufficient capacity on reliable networks, our business will sufferOur success partly depends on our ability to buy sufficient capacity on the networks of wireless carriers such as AT&T Wireless Services, American Mobile, Bell Atlantic Mobile and BellSouth Mobile Data and on the reliability and security of their systems. We depend on these companies to provide uninterrupted and "bug free" service and would be adversely affected if they failed to provide the required capacity or needed level of service. In addition, although we have some forward price protection in our existing agreements with certain carriers, we could be adversely affected if wireless carriers were to increase the prices of their services. Our existing agreements with the wireless carriers generally have one-to-three year terms. Some of these wireless carriers are, or could become, our competitors. We depend on third parties for sales of our services which could result in variable and unpredictable revenuesWe rely substantially on the efforts of others to sell many of our wireless data communications services. While we monitor the activities of our resellers, we cannot control how those who sell and market our service perform and we cannot be certain that their performance will be satisfactory. If the number of customers we obtain through these efforts is substantially lower than we expect for any reason, this would have an adverse effect on our business, operating results and financial condition. Our goal of building the GoAmerica brand is likely to be difficult and expensive and our inability to do so could adversely affect our businessWe believe that a quality brand identity will be essential if we are to increase our number of subscribers and our revenues. We intend to use a significant portion of the proceeds of the offering to increase substantially our marketing budget as part of our efforts to build the GoAmerica brand. Our sales and marketing expenses were approximately $909,000 and $3.3 million for the years ended December 31, 1998 and 1999, respectively. In 2000, we expect our sales and marketing expenses to substantially exceed our 2000 revenues. If our marketing efforts cost more than anticipated, if we cannot increase our brand awareness or if the GoAmerica brand is not well received by our existing and potential subscribers, our losses will increase and our business will be adversely affected. 9 We depend on our key management and on recruiting and retaining key personnel. The loss of our key employees could adversely affect our businessWe are particularly dependent on Aaron Dobrinsky and Joseph Korb, our chairman, chief executive officer and president, and our executive vice president, respectively, for most of our strategic, managerial and marketing initiatives. The unexpected loss of such officers would likely have an adverse effect on our business. In addition, because of the technical nature of our services and the dynamic market in which we compete, our performance depends on attracting and retaining other key employees. Competition for qualified personnel in the wireless data, communications and software industries is intense and finding and retaining such qualified personnel with experience in such industries is even more difficult. We believe there are only a limited number of individuals with the requisite skills to serve in many of our key positions, and it is becoming increasingly difficult to hire and retain these persons. Competitors and others may attempt to recruit our employees. A major part of our compensation to our key employees is in the form of stock option grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additional qualified personnel. We currently maintain and are the beneficiary of key person life insurance policies on the lives of Aaron Dobrinsky and Joseph Korb. We do not maintain insurance policies for any of our other employees. Wireless data systems failures could harm our business by injuring our reputation or lead to claims of liability for delayed, improper or unsecured transmission of dataA significant barrier to the growth of ecommerce and wireless data services has been the need for secure and reliable transmission of confidential information. Our existing wireless data services are dependent on real-time, continuous feeds from various sources. The ability of our subscribers to access data in real-time requires timely and uninterrupted connections with our wireless network carriers. Any significant disruption from our backup landline feeds could result in delays in our subscribers' ability to receive such information. In addition, our systems could be disrupted by unauthorized access, computer viruses and other accidental or intentional actions. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. If a third party were able to misappropriate our subscribers' personal or proprietary information or credit card information, we could be subject to claims, litigation or other potential liabilities that could adversely impact our business. There can be no assurance that our systems will operate appropriately if we experience a hardware or software failure. A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could adversely affect our business. An interruption in the supply of products and services that we obtain from third parties could cause a decline in sales of our servicesIn designing, developing and supporting our wireless data services, we rely on wireless carriers, mobile device manufacturers, content providers and software providers. These suppliers may experience difficulty in supplying us products or services sufficient to meet our needs or they may terminate or fail to renew contracts for supplying us these products or services on terms we find acceptable. Any significant interruption in the supply of any of these products or services could cause a decline in sales of our services, unless and until we are able to replace the functionality provided by these products and services. We also depend on third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost- effective basis and respond to emerging industry standards and other technological changes. We may face increased competition which may negatively impact our prices for our services or cause us to lose business opportunitiesThe market for our services is expected to become increasingly competitive. The widespread adoption of industry standards in the wireless data communications market may make it easier for new market entrants and existing competitors to introduce services that compete against ours. We developed our solutions using standard industry development tools. Many of our agreements with wireless carriers, wireless handheld device manufacturers and data providers are non-exclusive. Our competitors may use the same products and services 10 in competition with us. With time and capital, it would be possible for competitors to replicate our services and offer similar services at a lower price. We expect that we will compete primarily on the basis of the functionality, breadth, quality and price of our services. Our current and potential competitors include: . Emerging wireless Internet services providers, including OmniSky, Wireless Knowledge, a joint venture of Microsoft and Qualcomm, Incorporated, and Infospace.com which recently acquired Saraide.com and those, such as Aether Systems, Inc., focusing on specific industries such as on-line financial trading; . Wireless device manufacturers, such as 3Com, Motorola and Research in Motion; . Wireless network carriers, such as AT&T Wireless Services, Bell Atlantic Mobile, BellSouth Wireless Data, Sprint PCS and Nextel Communications, Inc.; and . Wireline internet service providers and portals, such as America Online and Yahoo!Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. In addition, we have established strategic relationships with many of our potential competitors. In the event such companies decide to compete directly with us, such relationships would likely be terminated, which might have an adverse effect on our business and reduce our market share or force us to lower prices to unprofitable levels. We may not have adequately protected our intellectual property rightsOur success substantially depends on our ability to sell services for which we may not have intellectual property rights. We currently do not have patents on any of our intellectual property. We have filed for a patent on certain aspects of our Go.Web technology. We cannot assure you we will be successful in protecting our intellectual property through patent law. In addition, although we have applied for U.S. federal trademark protection, we do not have any U.S. federal trademark registrations for the marks "GoAmerica", "Go.Web", "Law on the Go" or certain of our other marks and we may not be able to obtain such registrations due to conflicting marks or otherwise. We rely primarily on trade secret laws, patent law, copyright law, unfair competition law and confidentiality agreements to protect our intellectual property. To the extent that our technology is not adequately protected by intellectual property law, other companies could develop and market similar products or services which could adversely affect our business. We may be sued by third parties for infringement of their proprietary rights and we may incur defense costs and possibly royalty obligations or lose the right to use technology important to our businessThe telecommunications and software industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. As the number of participants in our market increases, the possibility of an intellectual property claim against us could increase. Any intellectual property claims, with or without merit, could be time consuming and expensive to litigate or settle and could divert management attention from administering our business. A third party asserting infringement claims against us or our customers with respect to our current or future products may adversely affect us by, for example, causing us to enter into costly royalty arrangements or forcing us to incur settlement or litigation costs. Please refer to "Business-- Intellectual Property Rights" for information relating to claims we have received. We may be subject to liability for transmitting information, and our insurance coverage may be inadequate to protect us from this liabilityWe may be subject to claims relating to information transmitted over systems we develop or operate. These claims could take the form of lawsuits for defamation, negligence, copyright or trademark infringement or other actions based on the nature and content of the materials. Although we carry general liability insurance, 11 our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. We may acquire or make investments in companies or technologies that could cause loss of value to our stockholders and disruption of our businessWe intend to explore opportunities to acquire companies or technologies in the future. Entering into an acquisition entails many risks, any of which could adversely affect our business, including: . failure to integrate the acquired assets and/or companies with our current business; . the price we pay may exceed the value we eventually realize; . loss of share value to our existing stockholders as a result of issuing equity securities as part or all of the purchase price; . potential loss of key employees from either our current business or the acquired business; . entering into markets in which we have little or no prior experience; . diversion of management's attention from other business concerns; . assumption of unanticipated liabilities related to the acquired assets; and . the business or technologies we acquire or in which we invest may have limited operating histories and may be subject to many of the same risks we are. Our quarterly operating results are subject to significant fluctuations and, as a result, period-to-period comparisons of our results of operations are not necessarily meaningfulOur quarterly operating results may fluctuate significantly in the future as a result of a variety of factors. These factors include: . the demand for and market acceptance of our services; . downward price adjustments by our competitors on services they offer that are similar to ours; . changes in the mix of services sold by our competitors; . technical difficulties or network downtime affecting wireless communications generally; . the ability to meet any increased technological demands of our customers; and . economic conditions specific to our industryTherefore, our operating results for any particular quarter may differ materially from our expectations or those of security analysts and may not be indicative of future operating results. The failure to meet expectations may cause the price of our common stock to decline substantially. We may need additional funds which, if available, could result in an increase in our interest expense or additional dilution to stockholders. If additional funds are needed and are not available, our business could be negatively impactedWe currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to fund our operating needs for at least the next 24 months, including the expansion of our sales and marketing program. Thereafter, we may require additional financing. At this time, we do not have any bank credit facility or other working capital credit line under which we may borrow funds for working capital or other general corporate purposes. If our plans or assumptions change or are inaccurate, we may be required to seek additional capital sooner than anticipated. We may need to raise such capital through public or private debt or equity financing. 12 If funds are raised through the issuance of equity securities, the percentage ownership of our then-current stockholders will be reduced and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through a bank credit facility or the issuance of debt securities, the holder of such indebtedness would have rights senior to your rights and the terms of such indebtedness could impose restrictions on our operations. If we need to raise additional funds, we may not be able to do so on terms favorable to us, or at all. If we cannot raise adequate funds on acceptable terms, we may not be able to continue to fund our operations. Risks Particular To Our Industry The market for our services is new and highly uncertainThe market for wireless data services is still emerging and continued growth in demand for and acceptance of these services remains uncertain. Current barriers to market acceptance of these services include cost, reliability, functionality and ease of use. We cannot be certain that these barriers will be overcome. If the market for our services does not grow or grows slower than we currently anticipate, our business, financial condition and operating results could be adversely affected. New laws and regulations that impact our industry could adversely affect our businessWe are not currently subject to direct regulation by the Federal Communications Commission or any other governmental agency, other than regulations applicable to businesses in general. However, in the future, we may become subject to regulation by the FCC or another regulatory agency. In addition, the wireless carriers who supply us airtime are subject to regulation by the FCC and regulations that affect them could adversely affect our business. Our business could suffer depending on the extent to which our activities or those of our customers or suppliers are regulated. Risks Particular To The Offering Our stock price, like that of many technology companies, may be volatile and it is difficult to predict whether a market for our common stock will developWe expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to a variety of factors, including: . announcements of technological or competitive developments; . acquisitions or strategic alliances by us or our competitors; . the gain or loss of a significant customer or order; . changes in estimates of our financial performance or changes in recommendations by securities analysts regarding us or our industry; or . general market or economic conditionsThis risk may be heightened because our industry is new and evolving, characterized by rapid technological change and susceptible to the introduction of new competing technologies or competitors In addition, equity securities of many technology companies have experienced significant price and volume fluctuations. These price and volume fluctuations often have been unrelated to the operating performance of the affected companies. Volatility in the market price of our common stock could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs and a diversion of management's attention and resources. 13 We cannot predict the extent to which investor interest in our common stock will lead to the development of a trading market or how liquid that market might become. As discussed earlier, our financial results are difficult to predict and could fluctuate significantly. Upon completion of this offering, you will experience dilutionOur tangible assets are readily identified assets like property, equipment, cash, securities and accounts receivable. The value of these assets on a pro forma as adjusted basis minus the value of our liabilities equals $3.75 per share, assuming the offering is completed. The offering price exceeds this amount by $12.25 per share. Therefore, you will be paying more for a share of stock than the value reflected in our accounts of tangible assets for that share. If we were forced to sell all our assets and distribute all the proceeds, you would not recover the amount you paid for shares unless we can sell the assets for more than the value we report for our tangible assets. We also have outstanding a large number of stock options and warrants to purchase common stock with exercise prices significantly below the price of shares in this offering. You will experience further dilution to the extent these options or warrants are exercised. We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stockProvisions of our certificate of incorporation and bylaws and provisions of Delaware law could dNaN21.211527.34NaN160000000NaNTrue2000
332130.0159.6NaN-92.334760KNOXVILLE12.8100-0.938NaN10471.58FalseNYSEFalseTrueHealthcare, Medical Equipment, and DrugsHealthcareHealthcare, Medical Equipment, and Drugs115000.0159600000.0TeamHealth Inc0.6493731928499.0Merrill Lynch & Co Inc\nGoldman Sachs & Co\nBarclays\nCiti2175.8140.70522.0099.012.001.000000True157995.015.4451119.001009.00149.006risk factors an investment in our common stock involves risks. before investing in our common stock, you should carefully consider the following information about these risks, together with the other information contained in this prospectus, including managements discussion and analysis of financial condition and results of operations and the financial statements and the notes thereto included elsewhere in this prospectus. if any of the following risks actually occurs, our business, financial condition, operating results and prospects could be adversely affected, which in turn could adversely affect the value of our common stock. risks related to our business the current u.s. and global economic conditions could materially adversely affect our results of operations and business condition. our operations and performance depend significantly on economic conditions. if the current economic situation continues or deteriorates further, our business could be negatively impacted by reduced demand for our services or third-party disruptions resulting from higher levels of unemployment, government budget deficits and other adverse economic conditions. for example, loss of jobs and lack of health insurance as a result of the deterioration of the economy could depress demand for healthcare services generally. patient volume trends in our hospital eds could be adversely affected as individuals potentially defer or forego seeking care in such departments due to the loss or reduction of coverage previously available to such individuals under commercial insurance or government healthcare programs. in addition, the continuation of the current economic downturn may adversely impact our ability to collect for the services we provide as higher unemployment and reductions in commercial managed care enrollment may increase the number of uninsured and underinsured patients seeking healthcare at one of our staffed eds. we could also be negatively affected if the federal government or the states reduce funding of medicare, medicaid and other federal and state healthcare programs in response to increasing deficits in their budgets. additionally, private third-party payers may take cost-containment measures, including lowering reimbursement rates or increasing patient co-payments and deductibles, which could adversely affect our business. any of these risks, among other economic factors, could have a material adverse effect on our financial condition and operating results, and the risks could become more pronounced if the problems in the u.s. and global economies continue or become worse.the current u.s. and state health reform legislative initiatives could adversely affect our operations and business condition. the obama administration and congress are considering federal legislation to reform the u.s. healthcare system. the current proposed federal health reform legislation includes various bills with various congressional sponsors. a common issue addressed in the proposed federal health reform initiatives is increasing access to health benefits for the uninsured or underinsured populations. some of the current proposed federal health reform legislation includes medicare payment reforms and reductions that could reduce physician payments in the future. some states also have pending health reform legislative initiatives. at this time, we are unable determine the ultimate content or timing of any health reform legislation. we will not be able to determine the effect that any such legislation may have on our operations and business condition until such legislation is enacted, but such legislation may adversely affect our operations and business condition.laws and regulations that regulate payments for medical services made by government sponsored healthcare programs could cause our revenues to decrease. our affiliated physician groups derive a significant portion of their net revenues less provision for uncollectibles from payments made by government sponsored healthcare programs such as medicare and state reimbursed programs. there are public and private sector pressures to restrain healthcare costs and to restrict reimbursement rates for medical services. any change in reimbursement policies, practices, interpretations, 12 regulations or legislation that places limitations on reimbursement amounts or practices could significantly affect hospitals, and consequently affect our operations unless we are able to renegotiate satisfactory contractual arrangements with our hospital clients and contracted physicians. under medicare law, centers for medicare& medicaid services, or cms, is required to adjust the medicare physician fee schedule, or mpfs, payment rates annually based on an update formula which includes application of the sustainable growth rate, or sgr, that was adopted in the balanced budget act of 1997. this formula has yielded negative updates every year beginning in 2002, although cms was able to take administrative steps to avert a reduction in 2003 and congress has taken a series of legislative actions to prevent reductions from 2004 to 2009. on october30, 2008, cms released its final 2009 mpfs covering the period from january1, 2009 through december31, 2009. as a result of a 1.1% statutory increase in the 2009 mpfs and an increase in the physician work values associated with certain emergency services, we estimate that the 2009 mpfs effectively provides for an average 4.0% increase in the 2009 payment amount over the 2008 payment amount for services most commonly provided by emergency physicians. we estimate these payment updates will increase our revenues from medicare and other revenue sources whose rates are linked to the medicare fee schedule by an estimated $9.0 million in 2009. additionally, the 2009 mpfs extends the physician quality reporting initiative, or pqri, payment incentive for physicians who successfully report measures under pqri for 2009 and 2010. the payments under the pqri extension increased from 1.5% in 2008 to 2.0% in 2009. on october30, 2009, cms released its final 2010 mpfs payment changes covering the period from january 1, 2010 through december 30, 2010. the final rule includes a 21.2% rate reduction in the mpfs for 2010 as a result of the application of the sgr. the pqri payment incentives for physicians who successfully report measures under pqri will remain at 2.0% for 2010. although there are current legislative proposals that call for a delay in the application of the sgr until 2011 and increase physician payments by 0.5% for 2010, such proposals have not yet been enacted. absent regulatory changes or further congressional action with respect to the application of the sgr, medicare physician services would be subject to significant reductions beginning on january1, 2010. any future reductions in amounts paid by government programs for physician services or changes in methods or regulations governing payment amounts or practices could cause our revenues to decline and we may not be able to offset reduced operating margins through cost reductions, increased volume or otherwise.if governmental authorities determine that we violate medicare, medicaid or other government payer reimbursement laws or regulations, our revenues may decrease and we may have to restructure our method of billing and collecting medicare, medicaid or other government program payments, respectively. the medicare prescription drug improvement and modernization act of 2003 amended the medicare reassignment statute as of december8, 2003 to permit our independent contractor physicians to reassign their right to receive medicare payments to us. we have restructured our method of billing and collecting medicare payments in light of this statutory reassignment exception. in addition, state medicaid programs have similar reassignment rules. while we seek to comply substantially with applicable medicaid reassignment regulations, government authorities may find that we do not comply in all respects with these regulations. we utilize physician assistants and nurse practitioners, sometimes referred to collectively as mid-level practitioners, to provide care under the supervision of our physicians. state and federal laws require that such supervision be performed and documented using specific procedures. we believe our billing and documentation practices related to our use of mid-level practitioners substantially comply with applicable state and federal laws, but enforcement authorities may find that our practices violate such laws. when our services are covered by multiple third-party payers, such as a primary and a secondary payer, financial responsibility must be allocated among the multiple payers in a process known as coordination of 13 benefits, or cob. the rules governing cob are complex, particularly when one of the payers is medicare or another government program. although we believe we currently have procedures in place to assure that we comply with applicable cob rules and that we process refunds appropriately when we receive overpayments or overprovisions, payers or enforcement agencies may determine that we have violated these requirements. reimbursement to us is typically conditioned on our providing the correct procedure and diagnosis codes and properly documenting both the service itself and the medical necessity of the service. despite our measures to ensure coding accuracy, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not reimbursable, that the service was not medically necessary, that there was a lack of sufficient supporting documentation, or for other reasons. incorrect or incomplete documentation and billing information, or the incorrect selection of codes, could result in nonpayment, recoupment or allegations of billing fraud. management is not aware of any inquiry, investigation or notice from any governmental entity indicating that we are in violation of any of the medicare, medicaid or other government payer reimbursement laws and regulations. however, such laws and related regulations and regulatory guidance may be ambiguous or contradictory, and may be interpreted or applied by prosecutorial, regulatory or judicial authorities in ways that we cannot predict. accordingly, our arrangements and business practices may be the subject of government scrutiny or be found to violate applicable laws.we may incur substantial costs defending our interpretations of federal and state government regulations and if we lose, the government could force us to restructure our operations and subject us to fines, monetary penalties and exclusion from participation in government-sponsored programs such as medicare and medicaid. our operations, including our billing and other arrangements with healthcare providers, are subject to extensive federal and state government regulation. such regulations include numerous laws directed at payment for services, conduct of operations, preventing fraud and abuse, laws prohibiting general business corporations, such as us, from practicing medicine, controlling physicians medical decisions or engaging in some practices such as splitting fees with physicians, and laws regulating billing and collection of reimbursement from government programs, such as medicare and medicaid, and from private payers. those laws may have related rules and regulations that are subject to interpretation and may not provide definitive guidance as to their application to our operations, including our arrangements with hospitals, physicians and professional corporations. see businessregulatory matters. we believe we are in substantial compliance with these laws, rules and regulations based upon what we believe are reasonable and defensible interpretations of these laws, rules and regulations. however, federal and state laws are broadly worded and may be interpreted or applied by prosecutorial, regulatory or judicial authorities in ways that we cannot predict. accordingly, our arrangements and business practices may be the subject of government scrutiny or be found to violate applicable laws. if federal or state government officials challenge our operations or arrangements with third parties that we have structured based upon our interpretation of these laws, rules and regulations, the challenge could potentially disrupt our business operations and we may incur substantial defense costs, even if we successfully defend our interpretation of these laws, rules and regulations. in addition, if the government successfully challenges our interpretation as to the applicability of these laws, rules and regulations as they relate to our operations and arrangements with third parties, that may have a material adverse effect on our business, financial condition and results of operations. in the event regulatory action were to limit or prohibit us from carrying on our business as we presently conduct it or from expanding our operations to certain jurisdictions, we may need to make structural, operational and organizational modifications to our company and/or our contractual arrangements with third party payers, physicians, professional corporations and hospitals. our operating costs could increase significantly as a result. we could also lose contracts or our revenues could decrease under existing contracts. moreover, our financing agreements may also prohibit modifications to our current structure and consequently require us to obtain the 14 consent of the holders of such indebtedness or require the refinancing of such indebtedness. any restructuring would also negatively impact our operations because our managements time and attention would be diverted from running our business in the ordinary course. for example, while we believe that our operations and arrangements comply substantially with existing applicable laws relating to the corporate practice of medicine and fee splitting, we cannot assure you that our existing contractual arrangements, including non-competition agreements with physicians, professional corporations and hospitals, will not be successfully challenged in certain states as unenforceable or as constituting the unlicensed practice of medicine or prohibited fee splitting. in this event, we could be subject to adverse judicial or administrative interpretations or to civil or criminal penalties, our contracts could be found to be legally invalid and unenforceable or we could be required to restructure our contractual arrangements with our affiliated physician groups.we are subject to billing investigations by federal and state authorities that could have a material adverse effect on our business, financial conditions and results of operations. state and federal statutes impose substantial penalties, including civil and criminal fines, exclusion from participation in government healthcare programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill governmental or other third-party payers for healthcare services. in addition, federal and certain state laws allow a private person to bring a civil action in the name of the u.s. government for false billing violations or other types of false claims. we believe that additional audits, inquiries and investigations from government agencies will continue to occur from time to time in the ordinary course of our business, which could result in substantial defense costs to us and a diversion of managements time and attention. such pending or future audits, inquiries or investigations, or the public disclosure of such matters, may have a material adverse effect on our business, financial condition and results of operations.we are subject to complex rules and regulations that govern our licensing and certification, and the failure to comply with these rules can result in delays in, or loss of, reimbursement for our services or civil or criminal sanctions. we, our affiliated physicians and the facilities in which we operate are subject to various federal, state and local licensing and certification laws and regulations and accreditation standards and other laws relating to, among other things, the adequacy of medical care, equipment, personnel and operating policies and procedures. we are also subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditations. in certain jurisdictions, changes in our ownership structure require pre- or post-notification to governmental licensing and certification agencies. relevant laws and regulations may also require re-application and approval to maintain or renew our operating authorities or require formal application and approval to continue providing services under certain government contracts. the relevant laws and regulations are complex and may be unclear or subject to interpretation. we are pursuing the steps we believe we must take to retain or obtain all requisite operating authorities. while we have made reasonable efforts to substantially comply with federal, state and local licensing and certification laws and regulations and accreditation standards based upon what we believe are reasonable and defensible interpretations of these laws, regulations and standards, agencies that administer these programs may find that we have failed to comply in some material respects. failure to comply with these licensing, certification and accreditation laws, regulations and standards could result in our services being found non-reimbursable or prior payments being subject to recoupment, and can give rise to civil or, in extreme cases, criminal penalties. in order to receive payment from medicare, medicaid and certain other government programs, healthcare providers are required to enroll in these programs by completing complex enrollment applications. 15 certain government programs, including medicare and medicaid programs, require notice or re-enrollment when certain ownership changes occur. generally, in jurisdictions where we are required to obtain a new licensing authority, we may also be required to re-enroll in that jurisdictions government payer program. if the payer requires us to complete the re-enrollment process prior to submitting reimbursement requests, we may be delayed in payment, receive refund requests or be subject to recoupment for services we provide in the interim. compliance with these change in ownership requirements is complicated by the fact that they differ from jurisdiction to jurisdiction, and in some cases are not uniformly applied or interpreted even within the same jurisdiction. failure to comply with these enrollment and reporting requirements could lead not only to delays in payment and refund requests, but in extreme cases could give rise to civil (including refunding of payments for services rendered) or criminal penalties in connection with prior changes in our operations and ownership structure. while we made reasonable efforts to substantially comply with these requirements in connection with prior changes in our operations and ownership structure, the agencies that administer these programs may find that we have failed to comply in some material respects.we could be subject to professional liability lawsuits, some of which we may not be fully insured against or reserved for, which could adversely affect our financial condition and results of operations. in recent years, physicians, hospitals and other participants in the healthcare industry have become subject to an increasing number of lawsuits alleging medical malpractice and related legal theories such as negligent hiring, supervision and credentialing, and vicarious liability for acts of their employees or independent contractors. many of these lawsuits involve large claims and substantial defense costs. although we do not engage in the practice of medicine or provide medical services nor do we control the practice of medicine by our affiliated physicians or affiliated medical groups or the compliance with regulatory requirements applicable to such physicians and physician groups, we have been and are involved in this type of litigation, and we may become so involved in the future. in addition, through our management of hospital departments and provision of non-physician healthcare personnel, patients who receive care from physicians or other healthcare providers affiliated with medical organizations and physician groups with whom we have a contractual relationship could sue us. effective march12, 2003, we began insuring our professional liability risks principally through a program of self-insurance reserves, commercial insurance and a captive insurance company arrangement. under our current professional liability insurance program, our exposure for claim losses under professional liability insurance policies provided to affiliated physicians and other healthcare practitioners is limited to the amounts of individual policy coverage limits but there is no limit for claim losses that exceed aggregate losses incurred under all insurance provided to affiliated physicians and other healthcare practitioners or for individual or aggregate professional liability losses incurred by us or other corporate entities that exceed aggregate losses incurred under such insurance. further, we may be exposed to individual claim losses in excess of limits of coverage under existing or historical insurance programs. while our provisions for professional liability claims and expenses are determined through actuarial estimates, such actuarial estimates may be exceeded by actual losses and related expenses in the future. claims, regardless of their merit or outcome, may also adversely affect our reputation and ability to expand our business. we could also be liable for claims against our affiliated physicians for incidents that occurred but were not reported during periods for which claims-made insurance covered the related risk. under generally accepted accounting principles, the cost of professional liability claims, which includes costs associated with litigating or settling claims, is accrued when the incidents that give rise to the claims occur. the accrual includes an estimate of the losses that will result from incidents, which occurred during the claims-made period, but were not reported during that period. these claims are referred to as incurred-but-not-reported claims, or ibnr claims. with respect to those physicians for whom we provide coverage for claims that occurred during periods prior to march12, 2003, we have acquired extended reporting period coverage, or tail coverage, for ibnr claims from a commercial insurance company. claim losses for periods prior to march12, 2003 may exceed the limits of available insurance coverage or reserves established by us for any losses in excess of such insurance coverage limits. 16 furthermore, for those portions of our professional liability losses that are insured through commercial insurance companies, we are subject to the credit risk of those insurance companies. while we believe our commercial insurance company providers are currently creditworthy, such insurance companies may not remain so in the future.the reserves that we have established for our professional liability losses are subject to inherent uncertainties and any deficiency may lead to a reduction in our net earnings. we have established reserves for losses and related expenses that represent estimates at a given point in time involving actuarial and statistical projections of our expectations of the ultimate resolution and administration of costs of losses incurred for professional liability risks for the period on and after march12, 2003. we have also established a reserve for potential losses in excess of commercial insurance aggregate coverage limits for the period prior to march12, 2003. insurance reserves are inherently subject to uncertainty. our reserves are based on historical claims, demographic factors, industry trends, severity and exposure factors and other actuarial assumptions. studies of projected ultimate professional liability losses are performed at least annually. we use the actuarial estimates to establish reserves. our reserves could be significantly affected should current and future occurrences differ from historical claim trends and expectations. while claims are monitored closely when estimating reserves, the complexity of the claims and the wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates. actual losses and related expenses may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. if our estimated reserves are determined to be inadequate, we will be required to increase reserves at the time of such determination, which would result in a corresponding reduction in our net earnings in the period in which such deficiency is determined. see managements discussion and analysis of financial condition and results of operationscritical accounting policies and estimatesinsurance reserves, note 14 to the audited consolidated financial statements and note 11 to the unaudited consolidated financial statements included in this prospectus.we depend on reimbursements by third-party payers, as well as payments by individuals, which could lead to delays and uncertainties in the reimbursement process. we receive a substantial portion of our payments for healthcare services on a fee for service basis from third-party payers, including medicare, medicaid, the u.s. governments military healthcare system and other governmental programs, private insurers and managed care organizations. we received approximately 57% of our net revenues less provision for uncollectibles from such third-party payers during 2008 and 2007. such amounts included approximately 24% from medicare and medicaid, collectively, in 2008 and 2007. the reimbursement process is complex and can involve lengthy delays. third-party payers continue their efforts to control expenditures for healthcare, including proposals to revise reimbursement policies. while we recognize revenue when healthcare services are provided, there can be delays before we receive payment. in addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, that services provided were not medically necessary, that services rendered in an ed did not require ed level care or that additional supporting documentation is necessary. retroactive adjustments may change amounts realized from third-party payers. we are subject to governmental audits of our reimbursement claims under medicare, medicaid, the u.s. governments military healthcare system and other governmental programs and may be required to repay these agencies if a finding is made that we were incorrectly reimbursed. delays and uncertainties in the reimbursement process may adversely affect accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs. we also may not be paid with respect to co-payments and deductibles that are the patients financial responsibility, or in those instances when physicians provide healthcare services to uninsured and underinsured individuals. amounts not covered by third-party payers are the obligations of individual patients for which we may not receive whole or partial payment. we may not receive whole or partial payments from uninsured and underinsured individuals. as a result of government laws and regulations requiring hospitals to screen and treat 17 patients who have an emergency medical condition regardless of their ability to pay and our obligation to provide such screening or treatment, a substantial increase in self-pay patients could result in increased costs associated with physician services for which sufficient net revenues less provision for uncollectibles are not realized to offset such additional physician service costs. in such an event, our earnings and cash flow would be adversely affected, potentially affecting our ability to maintain our restrictive debt covenant ratios and meet our financial obligations. in summary, the risks associated with third-party payers, co-payments and deductibles and uninsured individuals and the inability to monitor and manage accounts receivable successfully could have a material adverse effect on our business, financial condition and results of operations. furthermore, our collection policies or our provisions for allowances for medicare, medicaid and contractual discounts and doubtful accounts receivable may not be adequate.we are subject to the financial risks associated with our fee for service contracts which could decrease our revenues, including changes in patient volume, mix of insured and uninsured patients and patients covered by government sponsored healthcare programs and third party reimbursement rates. we derive our revenues primarily through two types of arrangements. if we have a flat fee contract with a hospital, the hospital bills and collects fees for physician services and remits a negotiated amount to us monthly. if we have a fee for service contract with a hospital, either we or our affiliated physicians collect the fees for physician services. consequently, under fee for service contracts, we assume the financial risks related to changes in the mix of insured, uninsured and underinsured patients and patients covered by government sponsored healthcare programs, third party reimbursement rates and changes in patient volume. we are subject to these risks because under our fee for service contracts, our fees decrease if a smaller number of patients receive physician services or if the patients who do receive services do not pay their bills for services rendered or we are not fully reimbursed for services rendered. our fee for service contractual arrangements also involve a credit risk related to services provided to uninsured and underinsured individuals. this risk is exacerbated in the hospital ed physician-staffing context because federal law requires hospital eds to evaluate all patients regardless of the severity of illness or injury. we believe that uninsured and underinsured patients are more likely to seek care at hospital eds because they frequently do not have a primary care physician with whom to consult. we also collect a relatively smaller portion of our fees for services rendered to uninsured and underinsured patients than for services rendered to insured patients. in addition, fee for service contracts also have less favorable cash flow characteristics in the start-up phase than traditional flat-rate contracts due to longer collection periods. our revenues could also be reduced if third-party payers successfully negotiate lower reimbursement rates for our physician services.failure to timely or accurately bill for our services could have a negative impact on our net revenues, bad debt expense and cash flow. billing for ed visits in a hospital setting and other physician-related services is complex. the practice of providing medical services in advance of payment or, in many cases, prior to assessment of ability to pay for such services, may have a significant negative impact on our net revenues, bad debt expense and cash flow. we bill numerous and varied payers, including self-pay patients, various forms of commercial insurance companies and medicare, medicaid, the u.s. governments military healthcare system and other government programs. these different payers typically have differing forms of billing requirements that must be met prior to receiving payment for services rendered. reimbursement to us is typically conditioned on our providing the proper procedure and diagnosis codes. incorrect or incomplete documentation and billing information could result in non-payment for services rendered. additional factors that could complicate our billing include: disputes between payers as to which party is responsible for payment; variation in coverage for similar services among various payers; 18 the difficulty of adherence to specific compliance requirements, coding and various other procedures mandated by responsible parties; failure to obtain proper physician enrollment and documentation in order to bill various commercial and governmental payers; failure to identify and obtain the proper insurance coverage for the patient; a0.04326022.021108.86940.9461596000001423.441False2009
3322158.0446.4NaN838.972304WESTLAKE VILLAGE12.28000.062NaN9786.87FalseNYSEFalseTrueConsumer NonDurables -- Food, Tobacco, Textiles, Apparel, Leather, ToysAgricultureConsumer Durables, NonDurables, Wholesale, Retail, and Some Services (Laundries, Repair Shops)NaNNaNDole Food Co Inc0.3890915357250.0Goldman Sachs & Co\nMerrill Lynch & Co Inc\nDeutsche Bank Securities Corp.\nWells Fargo Bank NA2123.9384.085NaN39NaN12.50NaNFalseNaN04.6672229.001009.00142.005risk factors investing in our common stock involves a high degree of risk. you should carefully consider the risks described below and the other information in this prospectus, including the consolidated financial statements and the related notes, before making a decision to buy our common stock. if any of the following risks actually occurs, our business could be harmed. in that case, the trading price of our common stock could decline, and you may lose all or part of your investment. risks relating to our business and industryadverse weather conditions, natural disasters, crop disease, pests and other natural conditions can impose significant costs and losses on our business. fresh produce, including produce used in canning and other packaged food operations, is vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common but difficult to predict. unfavorable growing conditions can reduce both crop size and crop quality. this risk is particularly true with respect to regions or countries from which we source a significant percentage of our products. in extreme cases, entire harvests may be lost in some geographic areas. these factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition. fresh produce is also vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions. for example, black sigatoka is a fungal disease that affects banana cultivation in most areas where they are grown commercially. the costs to control this disease and other infestations vary depending on the severity of the damage and the extent of the plantings affected. moreover, there can be no assurance that available technologies to control such infestations will continue to be effective. these infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.our business is highly competitive and we cannot assure you that we will maintain our current market share. many companies compete in our different businesses. however, only a few well-established companies operate on both a national and a regional basis with one or several branded product lines. we face strong competition from these and other companies in all our product lines. important factors with respect to our competitors include the following: some of our competitors may have greater operating flexibility and, in certain cases, this may permit them to respond better or more quickly to changes in the industry or to introduce new products and packaging more quickly and with greater marketing support. several of our packaged food product lines are sensitive to competition from national or regional brands, and many of our product lines compete with imports, private label products and fresh alternatives. we cannot predict the pricing or promotional actions of our competitors or whether those actions will have a negative effect on us. there can be no assurance that we will continue to compete effectively with our present and future competitors, and our ability to compete could be materially adversely affected by our leveraged position. our earnings are sensitive to fluctuations in market prices and demand for our products. excess supplies often cause severe price competition in our industry. growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product. fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. some items, such as lettuce, must be sold more quickly, while other items can be held in cold storage for longer periods of time. the selling price received for each type of produce depends on all of these factors, including the availability and quality of the produce item in the market, and the availability and quality of competing types of produce. in addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. to the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. however, even if market prices are unfavorable, produce items which are ready to be, or have been harvested must be brought to market promptly. a decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.our earnings are subject to seasonal variability. our earnings may be affected by seasonal factors, including: the seasonality of our supplies and consumer demand; the ability to process products during critical harvest periods; and the timing and effects of ripening and perishability. although banana production tends to be relatively stable throughout the year, banana pricing is seasonal because bananas compete against other fresh fruit that generally comes to market beginning in the summer. as a result, banana prices are typically higher during the first half of the year. our fresh vegetables segment experiences some seasonality as reflected by higher earnings in the first half of the year. our packaged foods segment experiences peak demand during certain well-known holidays and observances.currency exchange fluctuations may impact the results of our operations. we distribute our products in more than 90 countries throughout the world. our international sales are usually transacted in u.s.dollars, and european and asian currencies. our results of operations are affected by fluctuations in currency exchange rates in both sourcing and selling locations. although we enter into foreign currency exchange forward contracts from time to time to reduce our risk related to currency exchange fluctuation, our results of operations may still be impacted by foreign currency exchange rates, primarily the yen-to-u.s.dollar and euro-to-u.s.dollar exchange rates. for instance, we currently estimate that a 10% strengthening of the u.s.dollar relative to the japanese yen, euro and swedish krona would have reduced 2008 operating income by approximately $76million excluding the impact of foreign currency exchange hedges. because we do not hedge against all of our foreign currency exposure, our business will continue to be susceptible to foreign currency fluctuations.increases in commodity or raw product costs, such as fuel, paper, plastics and resins, could adversely affect our operating results. many factors may affect the cost and supply of fresh produce, including external conditions, commodity market fluctuations, currency fluctuations, changes in governmental laws and regulations, 15 agricultural programs, severe and prolonged weather conditions and natural disasters. increased costs for purchased fruit and vegetables have in the past negatively impacted our operating results, and there can be no assurance that they will not adversely affect our operating results in the future. the price of various commodities can significantly affect our costs. for example, the price of bunker fuel used in shipping operations, including fuel used in ships that we own or charter, is an important variable component of transportation costs. our fuel costs have increased substantially in recent years, and there can be no assurance that there will not be further increases in the future. in addition, fuel and transportation cost is a significant component of the price of much of the produce that we purchase from growers or distributors, and there can be no assurance that we will be able to pass on to our customers the increased costs we incur in these respects. the cost of paper and tinplate are also significant to us because some of our products are packed in cardboard boxes or cans for shipment. if the price of paper or tinplate increases and we are not able to effectively pass these price increases along to our customers, then our operating income will decrease. increased costs for paper and tinplate have in the past negatively impacted our operating income, and there can be no assurance that these increased costs will not adversely affect our operating results in the future.we face risks related to our former use of the pesticide dbcp. we formerly used dibromochloropropane, or dbcp, a nematocide that was used on a variety of crops throughout the world. the registration for dbcp with the u.s.government was cancelled in 1979 based in part on an apparent link to male sterility among chemical factory workers who produced dbcp. there are a number of pending lawsuits in the united states and other countries against the manufacturers of dbcp and the growers, including us, who used it in the past. the cost to defend or settle these lawsuits, and the costs to pay any judgments or settlements resulting from these lawsuits, or other lawsuits which might be brought, could have a material adverse effect on our business, financial condition or results of operations. see note11 to the condensed consolidated financial statements for the second quarter of fiscal year 2009 included elsewhere in this prospectus.the use of herbicides and other potentially hazardous substances in our operations may lead to environmental damage and result in increased costs to us. we use herbicides and other potentially hazardous substances in the operation of our business. we may have to pay for the costs or damages associated with the improper application, accidental release or the use or misuse of such substances. our insurance may not be adequate to cover such costs or damages or may not continue to be available at a price or under terms that are satisfactory to us. in such cases, payment of such costs or damages could have a material adverse effect on our business, results of operations and financial condition.the financing arrangements for the going-private merger transactions in 2003may increase our exposure to tax liability. a portion of our senior secured credit facilities have been incurred by our foreign subsidiaries and were used to fund the going-private merger transactions in 2003 through which mr.murdock became our sole, indirect stockholder. on august27, 2009, the internal revenue service, or irs, completed its examination of our u.s.federal income tax returns for the years 2002 to 2005 and issued a revenue agents report, or rar, that includes various proposed adjustments, including with respect to the going-private merger transactions. the irs is proposing that certain funding used in the going-private merger transactions is currently taxable and that certain related investment banking fees are not deductible. the net tax deficiency associated with the rar is $122million plus interest. we will file a protest letter vigorously challenging the proposed adjustments contained in the rar and will pursue resolution of these issues with the appeals division of the irs. however, we may not be successful with respect to some or all of our appeal, which could result in a material tax liability and 16 could adversely affect our results of operations and financial condition. we believe, based in part upon the advice of our tax advisors, that our tax treatment of such transactions was appropriate.we face other risks in connection with our international operations. our operations are heavily dependent upon products grown, purchased and sold internationally. in addition, our operations are a significant factor in the economies of many of the countries in which we operate, increasing our visibility and susceptibility to legal or regulatory changes. these activities are subject to risks that are inherent in operating in foreign countries, including the following: foreign countries could change laws and regulations or impose currency restrictions and other restraints; in some countries, there is a risk that the government may expropriate assets; some countries impose burdensome tariffs and quotas; political changes and economic crises may lead to changes in the business environment in which we operate; international conflict, including terrorist acts, could significantly impact our business, financial condition and results of operations; in some countries, our operations are dependent on leases and other agreements;and economic downturns, political instability and war or civil disturbances may disrupt production and distribution logistics or limit sales in individual markets. banana imports from latin america are subject to a tariff of 176 euros per metric ton for entry into the european union, or eu, market. under the eus previous banana regime, banana imports from latin america were subject to a tariff of 75euros per metric ton and were also subject to both import license requirements and volume quotas. these license requirements and volume quotas had the effect of limiting access to the eu banana market. the increase in the applicable tariff and the elimination of the volume restrictions applicable to latin american bananas may increase volatility in the market, which could materially adversely affect our business, results of operations or financial condition. see managements discussion and analysis of financial condition and results of operation other matters. in 2005, we received a tax assessment from honduras of approximately $137million (including the claimed tax, penalty, and interest through the date of assessment) relating to the disposition of all of our interest in cervecera hondurea, s.a. in 2001. we have been contesting the tax assessment. see note11 in the notes to the condensed consolidated financial statements for the second quarter of fiscal year 2009 included elsewhere in this prospectus.we may be required to pay significant penalties under european antitrust laws. the european commission, or ec, issued a decision imposing a 45.6million fine against dole and its german subsidiary, or the decision, on october15, 2008. on december24, 2008, we appealed the decision by filing an application for annulment, or application, with the european court of first instance, or cfi. on december3, 2008, the ec agreed in writing that if dole made an initial payment of $10million (7.6million) to the ec on or before january22, 2009, then the ec would stay the deadline for a provisional payment, or coverage by a prime bank guaranty, of the remaining balance (plus interest as from january22, 2009), until april30, 2009. dole made this initial $10million payment on january21, 2009, and dole provided the required bank guaranty for the remaining balance of the fine to the ec by the deadline of april30, 2009. 17 we believe that we have not violated the european competition laws and that our application has substantial legal merit, both for an annulment of the decision and fine in their entirety, or for a substantial reduction of the fine, but no assurances can be given that we will be successful on appeal. furthermore, the ultimate resolution of these items could materially impact our liquidity. we cannot predict the timing or outcome of our appeal of the ecs decision. see note11 in the notes to the condensed consolidated financial statements for the second quarter of fiscal year 2009 included elsewhere in this prospectus.the current global economic downturn could continue to result in a decrease in our sales and revenue, which could continue to adversely affect the results of our operations, and we cannot predict the extent or duration of these trends. as a result of the current global economic downturn, consumers may continue to reduce their purchases and seek value pricing, which may continue to affect sales and pricing of some of our products. such trends could continue to adversely affect the results of our operations and there can be no assurance whether or when consumer confidence will return or that these trends will not increase.global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing and disrupt the operations of our suppliers and customers. the global capital and credit markets have experienced increased volatility and disruption over the past year, making it more difficult for companies to access those markets. we depend in part on stable, liquid and well-functioning capital and credit markets to fund our operations. although we believe that our operating cash flows, access to capital and credit markets and existing revolving credit agreement will permit us to meet our financing needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.the current global economic downturn may have other impacts on participants in our industry, which cannot be fully predicted. the full impact of the current global economic downturn on customers, vendors and other business partners cannot be anticipated. for example, major customers or vendors may have financial challenges unrelated to us that could result in a decrease in their business with us or, in extreme cases, cause them to file for bankruptcy protection. similarly, parties to contracts may be forced to breach their obligations under those contracts. although we exercise prudent oversight of the credit ratings and financial strength of our major business partners and seek to diversify our risk to any single business partner, there can be no assurance that there will not be a bank, insurance company, supplier, customer or other financial partner that is unable to meet its contractual commitments to us. similarly, stresses and pressures in the industry may result in impacts on our business partners and competitors which could have wide ranging impacts on the future of the industry.terrorism and the uncertainty of war may have a material adverse effect on our operating results. terrorist attacks, such as the attacks that occurred in new york and washington,d.c. on september11, 2001, the subsequent response by the united states in afghanistan, iraq and other locations, and other acts of violence or war in the united states or abroad may affect the markets in which we operate and our operations and profitability. from time to time in the past, our operations or personnel have been the targets of terrorist or criminal attacks, and the risk of such attacks impacts our operations and results in increased security costs. further terrorist attacks against the united states or operators of united states-owned businesses outside the united states may occur, or 18 hostilities could develop based on the current international situation. the potential near-term and long-term effect these attacks may have on our business operations, our customers, the markets for our products, the united states economy and the economies of other places we source or sell our products is uncertain. the consequences of any terrorist attacks, or any armed conflicts, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business.our worldwide operations and products are highly regulated in the areas of food safety and protection of human health and the environment. our worldwide operations are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including laws and regulations governing the use and disposal of pesticides and other chemicals. these regulations directly affect day-to-day operations, and violations of these laws and regulations can result in substantial fines or penalties. there can be no assurance that these fines or penalties would not have a material adverse effect on our business, results of operations and financial condition. to maintain compliance with all of the laws and regulations that apply to our operations, we have been and may be required in the future to modify our operations, purchase new equipment or make capital improvements. further, we may recall a product (voluntarily or otherwise) if we or the regulators believe it presents a potential risk. in addition, we have been and in the future may become subject to lawsuits alleging that our operations and products caused personal injury or property damage.we are subject to the risk of product contamination and product liability claims. the sale of food products for human consumption involves the risk of injury to consumers. such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. we have from time to time been involved in product liability lawsuits, none of which were material to our business. while we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. for example, in the fall of 2006, a third party from whom we and others had purchased spinach recalled certain packaged fresh spinach due to contamination by e. coli. even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. we maintain product liability insurance, however, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.we are subject to transportation risks. an extended interruption in our ability to ship our products could have a material adverse effect on our business, financial condition and results of operations. similarly, any extended disruption in the distribution of our products could have a material adverse effect on our business, financial condition and results of operations. while we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption due to strike, natural disasters or otherwise, we cannot be sure that we would be able to do so or be successful in doing so in a timely and cost-effective manner. events or rumors relating to the dole brand could significantly impact our business. consumer and institutional recognition of the dole trademarks and related brands and the association of these brands with high quality and safe food products are an integral part of our business. the occurrence of any events or rumors that cause consumers and/or institutions to no longer associate these brands with high quality and safe food products may materially adversely affect the value of the dole brand name and demand for our products. we have licensed the dole brand name to several affiliated and unaffiliated companies for use in the united states and abroad. acts or omissions by these companies over which we have no control may also have such adverse effects.a portion of our workforce is unionized and labor disruptions could decrease our profitability. as of june20, 2009, approximately 35% of our employees worldwide worked under various collective bargaining agreements. our collective bargaining agreements with expirations in fiscal 2009 have each been renewed, other than one agreement that is currently under extension. our other collective bargaining agreements will expire in later years. we cannot assure you that we will be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and without production interruptions, including labor stoppages. a prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on the portion of our business affected by the dispute, which could impact our business, results of operations and financial condition. risks relating to our indebtednessour substantial indebtedness could adversely affect our operations, including our ability to perform our obligations under our debt obligations. we have a substantial amount of indebtedness. as of june20, 2009, we had approximately $1.2billion in senior secured indebtedness, $738million in senior unsecured indebtedness, including outstanding senior notes and debentures, approximately $66million in capital leases and approximately $53million in unsecured notes payable and other indebtedness. in addition, in connection with the merger transaction, we will assume $85million of dhm holdings debt that will be repaid from a portion of the net proceeds of this offering. our substantial indebtedness could have important consequences to you. for example, our substantial indebtedness may: make it more difficult for us to satisfy our obligations; limit our ability to borrow additional amounts in the future for working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy or other purposes or make such financing more costly; result in a triggering of customary cross-default and cross-acceleration provisions with respect to certain of our debt obligations if an event of default or acceleration occurs under one of our other debt obligations; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate purposes (by way of example, the issuance of our 13.875% senior secured notes due 2014, or 2014 notes, and amendment to the senior secured credit facilities during march 2009 increased our interest rates on these instruments significantly as compared to the interest rates as they existed prior to such events); expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest; 20 require us to sell assets (beyond those assets currently classified as assets held-for-sale) to reduce indebtedness or influence our decisions about whether to do so; increase our vulnerability to competitive pressures and to general adverse economic and industry conditions, including fluctuations in market interest rates or a downturn in our business; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; restrict us from making strategic acquisitions or pursuing business opportunities; place us at a disadvantage compared to our competitors that have relatively less indebtedness;and limit, along with the restrictive covenants in our credit facilities and senior note indentures, among other things, our ability to borrow additional funds. failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.we may be unable to generate sufficient cash flow to service our debt obligations. to service our debt, we require a significant amount of cash. our ability to generate cash, make scheduled payments or refinance our obligations depends on our successful financial and operating performance. our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and various financial, business and other factors, many of which are beyond our control. these factors include among others: economic and competitive conditions; changes in laws and regulations; operating difficulties, increased operating costs or pricing pressures we may experience; and delays in implementing any strategic projects. if our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. if we are required to take any actions referred to above, it could have a material adverse effect on our business, financial condition and results of operations. in addition, we cannot assure you that we would be able to take any of these actions on terms acceptable to us, or at all, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt agreements, in any of which events the default and cross-default risks set forth in the risk factor below titled restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely restrict our financial and operating flexibility and subject us to other risks would become relevant.despite our current indebtedness levels and the restrictive covenants set forth in agreements governing our indebtedness, we and our subsidiaries may still incur significant additional indebtedness, including secured indebtedness. incurring more indebtedness could increase the risks associated with our substantial indebtedness. subject to the restrictions in our senior secured credit facilities and the indentures governing our 7.25% senior notes due 2010, or 2010 notes, our 8.875% senior notes due 2011, or 2011 notes, our 8.75% debentures due 2013, or 2013 debentures, our 2014 notes and our 8% senior secured notes due 2016, or 2016 notes, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. although the terms of our senior secured credit facilities and the indentures governing our 2010 notes, our 2011 notes, our 2013 debentures, our 2014 notes and our 2016 notes contain restrictions on the incurrence of additional indebtedness, these 21 restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. if new debt is added to our and our subsidiaries current debt levels, the related risks that we now face could increase.restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely restrict our financial and operating flexibility and subject us to other risks. the indentures governing our 2010 notes, our 2011 notes, our 2013 debentures, our 2014 notes, our 2016 notes and our senior secured credit facilities, contain various restrictive covenants that limit our and our subsidiaries ability to take certain actions. in particular, these agreements limit our and our subsidiaries ability to, among other things: incur additional indebtedness; make restricted payments (including paying dividends on, redeeming or repurchasing our capital stock); issue preferred stock of subsidiaries; make certain investments or acquisitions; create liens on our assets to secure debt; engage in certain types of transactions with affiliates; place restrictions on the ability of restricted subsidiaries to make payments to us; merge, consolidate or transfer substantially all of our assets; and transfer and sell assets. any or all of these covenants could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. any future debt could also contain financial and other covenants more rest0.02047340.851065.484107.0234464375006778.521False2009
33233.017.515000.0NaNDENVER11.25000.05226.645992.86FalseNASDQFalseTrueFinanceBankingOtherNaNNaNMatrix Capital Corp,Denver,CoNaN262500.0Piper Jaffray Inc1247.56NaNNaN03NaN10.00NaNFalseNaN06.4450007.001007.00119.335NaNNaN29.65701.46NaN17500000NaNFalse1996
332435.0231.010000.0409.297888PITTSBURGH22.75000.01648.215697.48FalseNYSEFalseFalseOtherRestaraunts, Hotels, MotelsOtherNaNNaNInterstate Hotels Co0.4614492431000.0Merrill Lynch & Co Inc1249.15-1.616NaN06NaN21.00NaNFalseNaN08.4381679.001009.00150.629RISK FACTORS In addition to the other information contained in this Prospectus, the following risks and investment considerations should be carefully considered before purchasing shares of Common Stock offered hereby. Each of the following factors may have a material adverse effect on the Company's operations, financial results, financial condition, liquidity, market valuation or market liquidity in future periods RISKS ASSOCIATED WITH THE LODGING INDUSTRY The Company is subject to the risks inherent in the lodging industry. In addition to the specific risks discussed below, these risks include changes in general, regional and local economic conditions, overbuilding, varying levels of demand for rooms and related services, changes in travel patterns, the recurring need for renovation, refurbishment and improvement of hotel properties, changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs, changes in interest rates, the availability of financing and changes in real estate taxes and operating expensesCOMPETITION FOR GUESTS The lodging industry is highly competitive, and the Company's hotels generally are located in areas that contain numerous competitive properties Competitive factors in the lodging industry include room rates, quality of accommodations, name recognition, service levels and convenience of location and, to a lesser extent, the quality and scope of other amenities, including food and beverage facilities. Many of the properties with which the Company's hotels compete for guests are part of or owned by entities that have substantially greater financial or other resources than the CompanyRISKS ASSOCIATED WITH RAPID EXPANSION Growth Risks. The Company's revenues and net income have grown substantially during the past several years. Since consummation of the IPO, the Company's portfolio of Owned Hotels has increased from 14 hotels to 23 hotels, and the Company intends to continue to pursue a growth-oriented strategy for the foreseeable future, but there can be no assurance that the Company will achieve its growth objectives. The Company is subject to a variety of business risks generally associated with growing companies. The Company's ability to successfully pursue new growth opportunities will depend on a number of factors, including, among others, the Company's ability to identify suitable growth opportunities, finance acquisitions and integrate new hotels into its operations, as well as the competitive climate and the availability and cost of capital. While the Company believes that it will have sufficient resources to pursue its strategy, this belief is premised in part on adequate cash being generated from operations. The Company may in the future seek an additional increase in the capital available to it under its Acquisition Facility or otherwise obtain additional debt or equity financing, depending upon the amount of capital required to pursue future growth opportunities or address other needs, conditions in the capital markets and other factors. There can be no assurance that such increase or additional financing will be available to the Company on acceptable terms, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, there can be no assurance that the Company will be able to successfully integrate new hotels into its operations or that new hotels will achieve revenue and profitability levels comparable to the Company's existing portfolio hotels. Furthermore, the Company's expansion within its existing markets could adversely affect the financial performance of its existing portfolio hotels and expansion into new markets may present operating and marketing challenges that are different from those currently encountered by the Company in its existing markets. There can be no assurance that the Company will anticipate all of the changing demands that expanding operations will impose on the Company. Acquisition and Development Risks. The Company expects to acquire additional hotels in the future. Acquisitions entail the risk that investments will fail to perform in accordance with expectations. In addition, the Company intends to selectively develop new mid-scale and upper economy hotels in the future. New project development is subject to a number of risks, including market or site deterioration after acquisition and the possibility of construction delays or cost overruns due to regulatory approvals, inclement weather, labor or material shortages, work stoppages and the continued availability of construction and permanent financing. 7 12 CERTAIN EFFECTS OF ACQUISITIONS Since its IPO, the Company has acquired nine hotels. Under the purchase method of accounting, the assets, liabilities and results of operations associated with such acquisitions have been included in the Company's financial position and results of operations since the respective dates thereofAccordingly, the financial position and results of operations of the Company as of and for the nine months ended September 30, 1996 and subsequent dates and periods are not comparable to the financial position and results of operations of the Company as of and for prior dates and periods. The pro forma financial information presented gives effect to the IPO, the IPO Acquisitions, the Post-IPO Acquisitions, the Pending Acquisitions, the Equity Inns Transaction, the issuance of 3,534,880 shares of Common Stock in this Offering and certain other adjustments described herein as if such transactions had been completed on prior dates. The pro forma information presented is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicatedRISKS ASSOCIATED WITH OWNING OR LEASING REAL ESTATE At October 15, 1996, the Company owned fee title or controlling partnership interests in 23 of the 161 hotels it managed and operated 17 hotels under leases, ten of which are long-term leases (not including hotels the Company currently manages or leases as a result of the Equity Inns Transaction). In addition, the Company's business strategy includes the acquisition of additional hotels. Accordingly, the Company will be subject to varying degrees of risk generally related to owning or leasing real estate. These risks include, among others, changes in national, regional and local economic conditions, local real estate market conditions, changes in interest rates and in the availability, costs and terms of financing, liability for long-term lease obligations, the potential for uninsured casualty and other losses, the impact of present or future environmental legislation and compliance with environmental laws and adverse changes in zoning laws and other regulations, many of which are beyond the control of the Company. In addition, real estate investments are relatively illiquid; therefore, the ability of the Company to vary its portfolio of owned hotels in response to changes in economic and other conditions may be limitedTERMS OF MANAGEMENT AGREEMENTS On a pro forma basis net management revenues, including the Owned Hotels, represented 6.9% of the Company's total revenues for the nine months ended September 30, 1996. Hotel management agreements expire or are acquired, terminated or renegotiated in the ordinary course of the Company's business Typically, the Company's hotel management agreements may be terminated for various reasons, including default by the Company or sale of or foreclosure on the underlying property. In addition, approximately one-third of the Company's management agreements allow for termination without cause upon 30 to 90 days notice. An additional 21 management agreements allow for termination without cause upon 30 to 90 days notice with the payment of a termination fee. As of October 15, 1996, the Company had management agreements with remaining terms of less than five years for 103 of its 161 managed hotels. These 103 management agreements accounted for $10.7 million, or 3.4%, of the Company's total pro forma revenues for the nine months ended September 30, 1996. Sixteen of these management agreements (which generated $2.4 million, or 0.8%, of the Company's total pro forma revenues for the nine months ended September 30, 1996) are subject to termination in 1997. Although the net number of hotel management agreements to which the Company is a party has increased every year since 1987, there can be no assurance that the Company will continue to obtain new management agreements or that it will be able to renew or replace terminated or expired management agreements, or that the terms of new or renegotiated management agreements will be as favorable to the Company as the terms of prior agreements. In addition to the services called for under its management agreements, the Company often provides purchasing services, equipment leasing services, insurance and risk management services and other ancillary services to third-party hotel owners. On a pro forma basis, 4.4% of the Company's total revenues for the nine months ended September 30, 1996 were comprised of such services. The costs for these management services are typically subject to prospective approval by the hotel owners on an annual basis. Although the Company believes that its charges for these services are generally competitive with those provided by unrelated third 8 13 parties, there can be no assurance that third-party hotel owners will not choose to obtain such services from other providersCOMPETITION FOR MANAGEMENT AGREEMENTS The Company competes in the lodging industry with international, national, regional and local hotel management companies, some of which have greater financial or other resources than the Company. Competitive factors include relationships with hotel owners and investors, the availability of capital, financial performance, contract terms, brand name recognition, marketing support, reservation system capacity and the willingness to provide funds in connection with new management arrangements. In order for the Company to expand its business by acquiring additional management agreements, the Company may be required to offer more attractive terms to hotel owners than it has had to make in the past or to make equity investments in hotel properties. Hotel owners in many cases have been requesting lower base fees coupled with greater incentive fees or seeking capital contributions from independent hotel management companies in the form of loans or equity investmentsQUARTERLY FLUCTUATIONS IN OPERATING RESULTS The lodging industry is seasonal in nature, with the second and third calendar quarters generally accounting for a greater portion of annual revenues than the first and fourth calendar quarters. Quarterly earnings may be adversely affected by events beyond the Company's control, such as poor weather conditions, economic factors and other considerations affecting travel. In addition, the loss of one or several management agreements (which could involve the write-off of capitalized acquisition costs in addition to the loss of future revenues), the timing of achieving incremental revenues from additional hotels and the realization of a gain or loss upon the sale of a hotel also may adversely impact earnings comparisonsRISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS Since its IPO, the Company has financed its acquisitions largely with indebtedness obtained pursuant to the Company's Acquisition Facility, and intends to finance future acquisitions with the proceeds of this Offering, the Acquisition Facility or with other credit facilities obtained by the Company in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The credit agreement with respect to the Acquisition Facility contains restrictive covenants, including covenants limiting capital expenditures, incurrence of debt and sales of assets and requiring the Company to achieve certain financial ratios, some of which will become more restrictive over time. See "Indebtedness of the Company." The Company's existing indebtedness incurred under the Acquisition Facility, as well as its term indebtedness, is secured by mortgages on the Company's hotel properties as well as other assets of the Company. Among other consequences, the leverage of the Company and such restrictive covenants and other terms of the Company's debt instruments could impair the Company's ability to obtain additional financing in the future, to make acquisitions and to take advantage of significant business opportunities that may arise. In addition, the Company's leverage may increase its vulnerability to adverse general economic and lodging industry conditions and to increased competitive pressuresDIVIDEND POLICIES; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company has not paid any dividends on the Common Stock since the IPO and does not anticipate that it will pay any dividends in the foreseeable future. The Acquisition Facility prohibits payment of dividends or other distributions to shareholders. See "Dividend Policy." CONFLICTS OF INTEREST Milton Fine, the co-founder of the Company and its Chairman of the Board, and individuals and entities affiliated with Mr. Fine (collectively, the "Fine Family Shareholders") will beneficially own approximately 36.9% of the outstanding Common Stock following consummation of the Offering. See "Principal Shareholders." Certain of the Fine Family Shareholders also have ownership interests in 12 hotels that are managed or leased but not owned by the CompanyEach of the Fine Family Shareholders has agreed not to transfer any of its interests in any of these hotels (subject to certain permitted transfers) without first complying with a right 9 14 of first offer and a right of first refusal procedure in favor of the Company See "Certain Relationships and Related Transactions--Transactions with the Fine Family Shareholders." Except for one management agreement pursuant to which the Company waived its management fee for a period ending no later than November 30, 1998, the Company believes that its management agreements and leases for these hotels are on terms no less favorable to the Company than those that could have been obtained from unaffiliated third parties. These relationships, however, coupled with the ownership of Common Stock by the Fine Family Shareholders and representation on the Company's Board of Directors (the "Board") by certain of the Fine Family Shareholders, could give rise to potential conflicts of interest. The Company has implemented a policy requiring transactions between the Company and related parties to be approved by a majority of disinterested directors upon such disinterested directors' determination that the terms of the transaction are no less favorable to the Company than those that could have been obtained from unrelated third parties. There can be no assurance, however, that this policy will always be successful in eliminating the influence of such potential conflicts of interest. See "Management--Directors and Executive Officers." CONTROL BY PRINCIPAL SHAREHOLDERS The Fine Family Shareholders are able to exert substantial influence over the election of directors and the management and affairs of the Company and over the outcome of any corporate transactions or other matters submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of the Company's assets. Affiliates of Blackstone Real Estate Advisors L.P. (collectively, "Blackstone") may also be able to exert influence over these matters. Pursuant to a stockholders agreement (the "Interstone Stockholders Agreement") between the Company and Blackstone, dated June 25, 1996, so long as Blackstone owns 25% or more of the shares of Common Stock issued to it on the date of the Interstone Stockholders Agreement, the Fine Family Shareholders have agreed that they will vote all of their shares of Common Stock for the election of a director candidate nominated by Blackstone, and Blackstone has agreed to vote all of its shares of Common Stock for the election of the director candidates nominated by the BoardSUBSTANTIAL RELIANCE ON SENIOR MANAGEMENT The Company will place substantial reliance on the lodging industry knowledge and experience and the continued services of its senior management The Company's future success and its ability to manage future growth depends in large part upon the efforts of these persons and on the Company's ability to attract and retain these key executives and other highly qualified personnelCompetition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel GOVERNMENT REGULATION The Company is subject to numerous foreign and U.S. federal, state and local government laws, including those relating to the preparation and sale of food and beverages (such as health and liquor license laws), accessibility for disabled persons and general building and zoning requirements. Managers of hotels are also subject to laws governing their relationship with hotel employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws, including liquor license laws or increases in minimum wage rate requirements, reduces revenues and profits of hotels owned, leased and managed by the Company and could otherwise adversely affect the Company's operations. Although third-party hotel owners are generally responsible for all costs, expenses and liabilities incurred in connection with operating the hotels under the Company's management agreements, including compliance with government laws, the Company may be contingently liable for certain liabilities for which it does not maintain insurance, including certain employment liabilities, environmental liabilities and, in respect of properties in the United States, claims arising under the Americans with Disabilities Act. The Company also is subject to various foreign and U.S. federal, state and local environmental laws and regulations relating to the environment and the handling of hazardous substances which may impose or create significant potential environmental liabilities. Under the Company's hotel management agreements, third-party hotel owners are generally responsible for any environmental liabilities. However, under certain countries' laws, including those of the United States, the Company also may be exposed to environmental liabilities whether or not the third-party hotel owner is able to satisfy such liabilities. In addition, the Company will be subject to any environmental liabilities arising with respect to its owned hotels. 10 15 ANTI-TAKEOVER PROVISIONS The Company's Articles of Incorporation and By-Laws, and Pennsylvania law, include various provisions that could have the effect of making it more difficult for a third party to acquire control of the Company. See "Description of Capital Stock--Certain Corporate Governance Matters." In addition, the Company's Articles of Incorporation grant the Board authority to issue up to 25,000,000 shares of preferred stock having such rights, preferences and privileges as designated by the Board without shareholder approval. See "Description of Capital Stock--Preferred Stock." The rights of holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of such preferred stock that may be issued in the futureSHARES ELIGIBLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issuable upon the exercise of stock options), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Upon consummation of the Offering, the Company will have outstanding 34,639,296 shares of Common StockOf these shares, 18,190,946 are "restricted securities" under Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). The holders of 18,071,441 of these shares have registration rights with respect to future registrations of the Common Stock beneficially owned by them. In connection with this Offering, the Company, each of its directors and executive officers who is a holder of restricted securities, the Fine Family Shareholders and Blackstone have agreed, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of any such shares of Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). Trust Leasing and Trust Management have agreed with the Company not to sell any of the Common Stock acquired in connection with the Equity Inns Transaction until June 30, 1997 and not to sell more than 50% of such Common Stock until December 31, 1997See "Principal Shareholders," "Shares Eligible for Future Sale" and "Underwriting." 11-0.00182938.37678.44883.761196350000190.385False1996
332542.0469.7NaN1173.752369BOSTON32.1500NaN46.3411215.13FalseNASDQFalseTrueFinanceTradingOtherNaN469724460.0LPL Investment Holdings Inc0.3816235636693.0Goldman Sachs & Co\nMorgan Stanley\nMerrill Lynch & Co Inc\nJP Morgan & Co Inc2540.27-56.8626.00143.030.00NaNTrue0.004.0719296.750759.00157.007risk factors investing in our common stock involves a high degree of risk. you should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding to invest in our common stock. the occurrence of any of the following risks could harm our business, financial condition, results of operations or prospects. in that case, the trading price of our common stock could decline, and you may lose all or part of your investment. risks related to our business and industrywe depend on our ability to attract and retain experienced and productive advisors. we derive a large portion of our revenues from commissions and fees generated by our advisors. our ability to attract and retain experienced and productive advisors has contributed significantly to our growth and success, and our strategic plan is premised upon continued growth in the number of our advisors. if we fail to attract new advisors or to retain and motivate our current advisors, our business may suffer. the market for experienced and productive advisors is highly competitive, and we devote significant resources to attracting and retaining the most qualified advisors. in attracting and retaining advisors, we compete directly with a variety of financial institutions such as wirehouses, regional broker-dealers, banks, insurance companies and other independent broker-dealers. if we are not successful in attracting or retaining highly qualified advisors, we may not be able to recover the expense involved in attracting and training these individuals. there can be no assurance that we will be successful in our efforts to attract and retain the advisors needed to achieve our growth objectives.our financial condition and results of operations may be adversely affected by market fluctuations and other economic factors. our financial condition and results of operations may be adversely affected by market fluctuations and other economic factors. significant downturns and volatility in equity and other financial markets have had and could continue to have an adverse effect on our financial condition and results of operations. general economic and market factors can affect our commission and fee revenue. for example, a decrease in market levels can: reduce new investments by both new and existing clients in financial products that are linked to the stock market, such as variable life insurance, variable annuities, mutual funds and managed accounts; reduce trading activity, thereby affecting our brokerage commissions; reduce the value of advisory and brokerage assets, thereby reducing asset-based fee incomeand motivate clients to withdraw funds from their accounts, reducing advisory and brokerage assets, advisory fee revenue and asset-based fee income. in addition, because certain of our expenses are fixed, our ability to reduce them over short periods of time is limited, which could negatively impact our profitability.significant interest rate changes could affect our profitability and financial condition. our revenues are exposed to interest rate risk primarily from changes in the interest rates payable to us from banks participating in our cash sweep programs. in the current low interest rate environment, our revenue from our cash sweep program has declined and may decline further due to changes in interest rates or clients moving assets out of our cash sweep program. we may also be 14 limited in the amount we can reduce interest rates payable to clients in our cash sweep program and still offer a competitive return.lack of liquidity or access to capital could impair our business and financial condition. liquidity, or ready access to funds, is essential to our business. we expend significant resources investing in our business, particularly with respect to our technology and service platforms. in addition, we must maintain certain levels of required capital. as a result, reduced levels of liquidity could have a significant negative effect on us. some potential conditions that could negatively affect our liquidity include: illiquid or volatile markets; diminished access to debt or capital marketsor unforeseen cash or capital requirements, adverse legal settlements or judgments (including, among others, risks associated with auction rate securities). the capital and credit markets continue to experience varying degrees of volatility and disruption. in some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for businesses similar to ours. without sufficient liquidity, we could be required to curtail our operations, and our business would suffer. notwithstanding the self-funding nature of our operations, we may sometimes be required to fund timing differences arising from the delayed receipt of funds associated with the settlement of transactions in securities markets. historically, these timing differences were funded either with internally generated cash flow or, if needed, with funds drawn under short-term borrowing facilities, including both committed unsecured lines of credit and uncommitted lines of credit secured by client securities. lpl financial, one of our broker-dealer subsidiaries, utilizes uncommitted lines of credit secured by client securities to fund margin loans and other client transaction-related timing differences. in the event current resources are insufficient to satisfy our needs, we may need to rely on financing sources such as bank debt. the availability of additional financing will depend on a variety of factors such as market conditions; the general availability of credit; the volume of trading activities; the overall availability of credit to the financial services industry; our credit ratings and credit capacityand the possibility that our stockholders, advisors or lenders could develop a negative perception of our long-or short-term financial prospects if the level of our business activity decreases due to a market downturn. similarly, our access to funds may be impaired if regulatory authorities or rating organizations take negative actions against us. disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. such market conditions may limit our ability to satisfy statutory capital requirements, generate commission, fee and other market-related revenue to meet liquidity needs and access the capital necessary to grow our business. as such, we may be forced to delay raising capital, issue different types of capital than we would otherwise, less effectively deploy such capital or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility. if the counterparties to the derivative instruments we use to hedge our interest rate risk default, we may be exposed to risks we had sought to mitigate. we use derivative instruments to hedge our interest rate risk. if our counterparties fail to honor their obligations under the derivative instruments, our hedges of the interest rate risk will be ineffective. that failure could have an adverse effect on our financial condition, results of operations and cash flows that could be material. for the names of key counterparties upon which we currently rely, see managements discussion and analysis of financial condition and results of operationsquantitative and qualitative disclosures about riskinterest rate risk.a loss of our marketing relationships with manufacturers of financial products could harm our relationship with our advisors and, in turn, their clients. we operate on an open architecture product platform with no proprietary financial products. to help our advisors meet their clients needs with suitable investment options, we have relationships with most of the industry-leading providers of financial and insurance products. we have sponsorship agreements with some manufacturers of fixed and variable annuities and mutual funds that, subject to the survival of certain terms and conditions, may be terminated upon notice. if we lose our relationships with one or more of these manufacturers, our ability to serve our advisors and our business may be materially and adversely affected. risks related to our regulatory environmentregulatory developments and our failure to comply with regulations could adversely affect our business by increasing our costs and exposure to litigation, affecting our reputation and making our business less profitable. our business is subject to extensive u.s. regulation and supervision, including securities and investment advisory services. the securities industry in the united states is subject to extensive regulation under both federal and state laws. our broker-dealer subsidiary, lpl financial, is: registered as a broker-dealer with the securities and exchange commission (sec), each of the 50states, and the district of columbia, puerto rico and the u.s.virgin islands; registered as an investment advisor with the sec; a member of financial industry regulatory authority, inc. (finra); regulated by the commodities future trading commission (cftc) with respect to the futures and commodities trading activities it conducts as an introducing brokerand a member of the nasdaq stock market and the chicago stock exchange. much of the regulation of broker-dealers has been delegated to self-regulatory organizations (sros), namely finra and the municipal securities rulemaking board (msrb). the primary regulators of lpl financial are finra, and for municipal securities, the msrb. the cftc has designated the national futures association (nfa) as lpl financials primary regulator for futures and commodities trading activities. the sec, finra, cftc, office of the comptroller of the currency (occ), various securities and futures exchanges and other u.s.governmental or regulatory authorities continuously review legislative and regulatory initiatives and may adopt new or revised laws and regulations. there can also be no assurance that other federal or state agencies will not attempt to further regulate our business. these legislative and regulatory initiatives may affect the way in which we conduct our business and may make our business model less profitable. our ability to conduct business in the jurisdictions in which we currently operate depends on our compliance with the laws, rules and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of these jurisdictions. our ability to comply with all applicable laws, rules 16 and regulations is largely dependent on our establishment and maintenance of compliance, audit and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk management personnel. while we have adopted policies and procedures reasonably designed to comply with all applicable laws, rules and regulations, these systems and procedures may not be fully effective, and there can be no assurance that regulators or third parties will not raise material issues with respect to our past or future compliance with applicable regulations. our profitability could also be affected by rules and regulations that impact the business and financial communities generally and, in particular, our advisors clients, including changes to the laws governing taxation (including the classification of independent contractor status of our advisors), electronic commerce, privacy and data protection. failure to comply with new rules and regulations, including in particular, rules and regulations that may arise pursuant to the dodd-frank wall street reform and consumer protection act, could subject us to regulatory actions or litigation and it could have a material adverse effect on our business, results of operations, cash flows or financial condition. in addition, new rules and regulations could result in limitations on the lines of business we conduct, modifications to our business practices, increased capital requirements or additional costs. for example, the u.s. department of labor has issued a proposed rule that, if adopted as currently proposed, would broaden the circumstances under which we may be considered a fiduciary under section3(21) of the employee retirement income security act of 1974, as amended (erisa).we are subject to various regulatory ownership requirements, which, if not complied with, could result in the restriction of the ongoing conduct, growth or even liquidation of parts of our business. the business activities that we may conduct are limited by various regulatory agencies. our membership agreement with finra may be amended by application to include additional business activities. this application process is time-consuming and may not be successful. as a result, we may be prevented from entering new potentially profitable businesses in a timely manner, or at all. in addition, as a member of finra, we are subject to certain regulations regarding changes in control of our ownership. rule1017 of the national association of securities dealers (nasd) generally provides, among other things, that finra approval must be obtained in connection with any transaction resulting in a change in our equity ownership that results in one person or entity directly or indirectly owning or controlling 25% or more of our equity capital. similarly, the occ imposes advance approval requirements for a change of control, and control is presumed to exist if a person acquires 10% or more of our common stock. these regulatory approval processes can result in delay, increased costs and/or impose additional transaction terms in connection with a proposed change of control, such as capital contributions to the regulated entity. as a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or prohibited.we are subject to various regulatory capital requirements, which, if not complied with, could result in the restriction of the ongoing conduct, growth, or even liquidation of parts of our business. the sec, finra, cftc, occ and nfa have extensive rules and regulations with respect to capital requirements. as a registered broker-dealer, lpl financial is subject to rule15c3-1 (uniform net capital rule) under the securities exchange act of 1934, as amended (the exchange act), and related sro requirements. the cftc and nfa also impose net capital requirements. the uniform net capital rule specifies minimum capital requirements that are intended to ensure the general soundness and liquidity of broker-dealers. because we are not a registered broker-dealer, we are not subject to the uniform net capital rule. however, our ability to withdraw capital from our broker-dealer subsidiaries could be restricted, which in turn could limit our ability to repay debt and redeem or purchase shares of our outstanding stock. a large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business. failure to comply with erisa regulations could result in penalties against us. we are subject to erisa and sections4975(c)(1)(a), (b), (c)and (d)of the internal revenue code of 1986, as amended (the internal revenue code), and to regulations promulgated thereunder, insofar as we act as a fiduciary under erisa with respect to benefit plan clients or otherwise deal with benefit plan clients. erisa and applicable provisions of the internal revenue code impose duties on persons who are fiduciaries under erisa, prohibit specified transactions involving erisa plan clients (including, without limitation, employee benefit plans (as defined in section3(3) of erisa), individual retirement accounts and keogh plans) and impose monetary penalties for violations of these prohibitions. our failure to comply with these requirements could result in significant penalties against us that could have a material adverse effect on our business (or, in a worst case, severely limit the extent to which we could act as fiduciaries for any plans under erisa). risks related to our competitionwe operate in an intensely competitive industry, which could cause us to lose advisors and their assets, thereby reducing our revenues and net income. we are subject to competition in all aspects of our business, including competition for our advisors and their clients, from: asset management firms; commercial banks and thrift institutions; insurance companies; other clearing/custodial technology companiesand brokerage and investment banking firms. many of our competitors have substantially greater resources than we do and may offer a broader range of services, including financial products, across more markets. some operate in a different regulatory environment than we do which may give them certain competitive advantages in the services they offer. for example, certain of our competitors only provide clearing services and consequently would not have any supervision or oversight liability relating to actions of their financial advisors. we believe that competition within our industry will intensify as a result of consolidation and acquisition activity and because new competitors face few barriers to entry. if we fail to continue to attract highly qualified advisors or advisors licensed with us leave us to pursue other opportunities, or if current or potential clients of our advisors decide to use one of our competitors, we could face a significant decline in market share, commission and fee revenues and net income. if we are required to increase our payout of commissions and fees to our advisors in order to remain competitive, our net income could be significantly reduced.poor service or performance of the financial products that we offer or competitive pressures on pricing of such services or products may cause clients of our advisors to withdraw their assets on short notice. clients of our advisors control their assets under management with us. poor service or performance of the financial products that we offer or competitive pressures on pricing of such services or products may result in the loss of accounts. in addition, we must monitor the pricing of our services and financial products in relation to competitors and periodically may need to adjust commission and fee rates, interest rates on deposits and margin loans and other fee structures to remain competitive. competition from other financial services firms, such as reduced commissions to attract clients or trading volume or higher deposit rates to attract client cash balances, could adversely impact our business. the decrease in revenue that could result from such an event could have a material adverse effect on our business. we face competition in attracting and retaining key talent. our success and future growth depends upon our ability to attract and retain qualified employees. there is significant competition for qualified employees in the broker-dealer industry. we may not be able to retain our existing employees or fill new positions or vacancies created by expansion or turnover. the loss or unavailability of these individuals could have a material adverse effect on our business. moreover, our success depends upon the continued services of our key senior management personnel, including our executive officers and senior managers. the loss of one or more of our key senior management personnel, and the failure to recruit a suitable replacement or replacements, could have a material adverse effect on our business. risks related to our debtour indebtedness could adversely affect our financial health and may limit our ability to use debt to fund future capital needs. at september30, 2010, we had total indebtedness of $1.4billion. our level of indebtedness could increase our vulnerability to general adverse economic and industry conditions. it could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes. in addition, our level of indebtedness may limit our flexibility in planning for changes in our business and the industry in which we operate, place us at a competitive disadvantage compared to our competitors that have less debt and limit our ability to borrow additional funds. our ability to make scheduled payments on or to refinance indebtedness obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. in addition, as discussed above, we are limited in the amount of capital that we can draw from our broker-dealer subsidiaries. if our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. these alternative measures may not be successful or feasible. our third amended and restated credit agreement (senior secured credit agreement) restricts our ability to sell assets. even if we could consummate those sales, the proceeds that we realize from them may not be adequate to meet any debt service obligations then due. furthermore, if an event of default were to occur with respect to our senior secured credit agreement or other indebtedness, our creditors could, among other things, accelerate the maturity of our indebtedness. in addition, as a result of reduced operating performance or weaker than expected financial condition, rating agencies could downgrade our senior unsecured subordinated notes, which would adversely affect the value of shares of our common stock. our senior secured credit agreement permits us to incur additional indebtedness. although our senior secured credit agreement contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness as defined in our senior secured credit agreement. to the extent new debt or other obligations are added to our currently anticipated debt levels, the substantial indebtedness risks described above would increase. restrictions under certain of our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business. certain of our indebtedness contain customary restrictions on our activities, including covenants that may restrict us from: incurring additional indebtedness or issuing disqualified stock or preferred stock; paying dividends on, redeeming or repurchasing our capital stock; making investments or acquisitions; creating liens; selling assets; restricting dividends or other payments to us; guaranteeing indebtedness; engaging in transactions with affiliatesand consolidating, merging or transferring all or substantially all of our assets. we are also required to meet specified financial ratios. these restrictions may prevent us from taking actions that we believe would be in the best interest of our business. our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control. if we violate any of these covenants and are unable to obtain waivers, we would be in default under the applicable agreements and payment of the indebtedness could be accelerated. the acceleration of our indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. if our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to refinance it. even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. if our indebtedness is in default for any reason, our business could be materially and adversely affected. in addition, complying with these covenants may also cause us to take actions that are not favorable to holders of the common stock and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.provisions of our senior secured credit agreement could discourage an acquisition of us by a third party. certain provisions of our senior secured credit agreement could make it more difficult or more expensive for a third party to acquire us, and any of our future debt agreements may contain similar provisions. upon the occurrence of certain transactions constituting a change of control, all indebtedness under our senior secured credit agreement may be accelerated and become due and payable. a potential acquirer may not have sufficient financial resources to purchase our outstanding indebtedness in connection with a change of control. risks related to our technologywe rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions. our business relies extensively on electronic data processing and communications systems. in addition to better serving our advisors and clients, the effective use of technology increases efficiency and enables firms like ours to reduce costs. our continued success will depend, in part, upon: our ability to successfully maintain and upgrade the capability of our systems; 20 our ability to address the needs of our advisors and their clients by using technology to provide products and services that satisfy their demandsand our ability to retain skilled information technology employees. failure of our systems, which could result from events beyond our control, or an inability to effectively upgrade those systems or implement new technology-driven products or services, could result in financial losses, liability to clients and damage to our reputation. our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. although we take protective measures and endeavor to modify them as circumstances warrant, the computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. if one or more of these events occur, this could jeopardize our own, our advisors or their clients or counterparties confidential and other information processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our own, our advisors or their clients, our counterparties or third parties operations. we may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses that are either not insured or are not fully covered through any insurance we maintain.the securities settlement process exposes us to risks that may expose our advisors and us to adverse movements in price. lpl financial, one of our subsidiaries, provides clearing services and trade processing for our advisors and their clients and certain financial institutions. broker-dealers that clear their own trades are subject to substantially more regulatory requirements than brokers that outsource these functions to third-party providers. errors in performing clearing functions, including clerical, technological and other errors related to the handling of funds and securities held by us on behalf of clients, could lead to censures, fines or other sanctions imposed by applicable regulatory authorities as well as losses and liability in related lawsuits and proceedings brought by our advisors clients and others. any unsettled securities transactions or wrongly executed transactions may expose our advisors and us to adverse movements in the prices of such securities.our networks may be vulnerable to security risks. the secure transmission of confidential information over public networks is a critical element of our operations. as part of our normal operations, we maintain and transmit confidential information about clients of our advisors as well as proprietary information relating to our business operations. our application service provider systems maintain and process confidential data on behalf of advisors and their clients, some of which is critical to our advisors business operations. if our application service provider systems are disrupted or fail for any reason, or if our systems or facilities are infiltrated or damaged by unauthorized persons, our advisors could experience data loss, financial loss, harm to reputation and significant business interruption. if such a disruption or failure occurs, we may be exposed to unexpected liability, advisors may withdraw their assets, our reputation may be tarnished and there could be a material adverse effect on our business. our networks may be vulnerable to unauthorized access, computer viruses and other security problems in the future. we rely on our advisors to comply with our policies and procedures to safeguard confidential data. the failure of our advisors to comply with such policies and procedures could result in the loss or wrongful use of their clients confidential information or other sensitive information. in addition, even if we and our advisors comply with our policies and procedures, persons who circumvent security measures could wrongfully use our confidential information or clients 21 confidential information or cause interruptions or malfunctions in our operations. such loss or use could, among other things: seriously damage our reputation; allow competitors access to our proprietary business information; subject us to liability for a failure to safeguard client data; result in the termination of relationships with our advisors; subject us to regulatory sanctions or burdens, based on the authority of the sec and finra to enforce regulations regarding business continuity planningand require significant capital and operating expenditures to investigate and remediate the breach.failure to maintain technological capabilities, flaws in existing technology, difficulties in upgrading our technology platform or the introduction of a competitive platform could have a material adverse effect on our business. we depend on highly specialized and, in many cases, proprietary technology to support our business functions, including among others: securities trading and custody; portfolio management; customer service; accounting and internal financial processes and controlsand regulatory compliance and reporting. in addition, our continued success depends on our ability to effectively adopt new or adapt existing technologies to meet client, industry and regulatory demands. we might be required to make significant capital expenditures to maintain competitive technology. for example, we believe that our technology platform, particularly our branchnet system, is one of our competitive strengths, and our future success will depend in part on our ability to anticipate and adapt to technological advancements required to meet the changing demands of our advisors. the emergence of new industry standards and practices could render our existing systems obsolete or uncompetitive. any upgrades or expansions may require significant expenditures of funds and may also cause us to suffer system degradations, outages and failures. there cannot be any assurance that we will have sufficient funds to adequately update and expand our networks, nor can there be any assurance that any upgrade or expansion attempts will be successful and accepted by our current and prospective advisors. if our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of advisors and could harm our reputation. a technological breakdown could also interfere with our ability to comply with financial reporting-0.01559514.611197.963646.1674697244603113.486False2010
3326NaN16.3NaNNaNAUSTINNaN0.021NaN13062.91FalseAMEXFalseTrueOtherConstructionOtherNaNNaNWilson Holdings IncNaNNaNCapital Growth Financial LLC2525.09NaNNaN11NaN3.25NaNFalseNaN03.0010003.001003.0013.001risk factors an investment in our common stock involves a high degree of risk and many uncertainties. you should carefully consider the specific factors listed below before purchaser our securities. if one or more of the possibilities described as risks below actually occur, our operating results and financial condition would likely suffer and the trading price of our common stock could fall, causing you to lose some or all of your investment in the shares of common stock you purchase. the following is a description of what we consider our key challenges and material risks. risks related to our businessour current operating business has a limited operating history and revenues. in october 2005, we acquired wilson family communities, inc., or wfc, which has a limited operating history. accordingly, our business is subject to substantial risks inherent in the commencement of a new business enterprise in an intensely competitive industry. the business of wfc was conducted, beginning in 2002, by athena equity partners-hays, l.p., or athena, to engage in land acquisition and development and, beginning in 2005, to provide homebuilder services. prior to its merger with wfc, athena did not generate significant revenues, and, through march 31, 2007, our company has generated revenues of only approximately $8.8 million and has incurred cumulative net losses of approximately $17.0 million. there can be no assurance that we will be able to successfully acquire, develop and/or market land, develop and market our homebuilder services, commence our homebuilding activities, generate revenues, or ever operate on a profitable basis. we currently have only one active homebuilder for our homebuilder services and are evaluating whether to continue providing services to homebuilders. any investment in our company should be considered a high-risk investment because the investor will be placing funds at risk in a company with unknown costs, expenses, competition, and other problems to which new ventures are often subject. investors should not invest in our company unless they can afford to lose their entire investment.we have incurred a significant amount of debt, but will require additional substantial capital to continue to pursue our operating strategy. we had approximately $4.4 million in cash and cash equivalents at march 31, 2007. we plan to commit several million dollars in cash to exercise option rights to purchase land, develop land and guarantee certain payments regarding the development of optioned land over the next year. we have secured lines of credit totaling approximately $25.5 million. approximately $1.6 million was drawn against these lines of credit as of march 31, 2007, which will be repaid as finished lots and completed homes are sold. approximately $328,000 of the notes payable relate to variable interest entities, or vies, that had drawn on the lines of credit, which we have guaranteed, to build homes that will be repaid as the completed homes are sold. we anticipate investing approximately $23 million for purchase of land, installment payments, options fees and development costs over the next twelve months. this amount includes costs for development of land, such as installation of water and wastewater infrastructure, streets and common areas. we intend to purchase or obtain options to purchase additional acreage for development and additional finished lots for sale. we have issued and sold an aggregate of $16.75 million in principal amount of convertible promissory notes since december 2005. these notes bear interest at a fixed rate of 5.0% per annum, with the principal amount of such notes convertible into shares of our common stock at the rate of one share per $2.00 of principal, which conversion rate is subject to proportionate adjustment for stock splits, stock dividends and recapitalizations as well as a ratchet adjustment which will apply if we sell shares of our common stock in the future at a price per share of less than $2.00, provided that such conversion rate may not be reduced below a rate of one share of common stock for each $1.00 of note principal. our growth plans will require substantial amounts of cash for earnest money deposits, land purchases, development costs and interest payments, and to provide financing or surety services to our homebuilder clients. until we begin to sell an adequate number of lots and services to cover our monthly operating expenses, 8 costs associated with our sales, marketing and general and administrative activities will deplete cash. our articles of incorporation contain no limits on the amount of indebtedness we may incur.we are seeking additional credit lines to finance land purchases and development costs. through march 31, 2007, we have closed on four major land development projects that used $15.7 million in cash to exercise land purchase options, develop and entitle land and acquire entitled acreage. we anticipate purchasing and committing to various agreements to purchase land that could have performance clauses requiring several million dollars in cash and borrowings. the majority of our expenditures in the past have been for inventory, consisting of land, land development and land options totaling over $31 million as of march 31, 2007. to secure additional inventory, we will be required to put up earnest money deposits, make cash down payments, acquire acreage tracts and pay for certain land development activities costing several million dollars. this amount includes the development of land, including costs for the installation of water, sewage, streets and common areas. we intend to continue our growth plan and expect to purchase or obtain options to purchase additional acreage for development and additional finished lots to provide ample supplies for our homebuilder customers. we intend to use debt and may utilize joint venture financing as well as cash generated from lot and land sales to finance these activities. in the normal course of business, we enter into various land purchase option agreements that require earnest money deposits. in order for us to start or continue the development process, we may incur development costs before we exercise an option agreement. we currently have approximately $451,000 in capitalized development costs, earnest money and deposits outstanding of which the entire amount would be forfeited and expensed if we were to cancel all of these agreements. should our financing efforts be insufficient to execute our business plan, we may be required to seek additional sources of capital, which may include partnering with one or more established operating companies that are interested in our emerging business or entering into joint venture arrangements for the development of certain of our properties. however, if we were required to resort to partnering or joint venture relationships as a means to raise needed capital or reduce our cost burden, we likely will be required to cede some control over our activities and negotiate our business plan with our business or joint venture partners.we are vulnerable to concentration risks because our initial operations have been limited to the central texas area. our real estate activities have to date been conducted almost entirely in the central texas region, which we define as encompassing the austin metropolitan statistical area, or austin msa, and the san antonio metropolitan statistical area, or san antonio msa. this geographic concentration, combined with a limited number of projects that we plan to pursue, make our operations more vulnerable to local economic downturns and adverse project-specific risks than those of larger, more diversified companies. the performance of the central texas economy will affect our sales and, consequently, the underlying values of our properties. for example, the economy in the austin msa is heavily influenced by conditions in the technology industries. during periods of weakness or instability in technology industries, we may experience reduced sales, particularly with respect to high-end properties, which can significantly affect our financial condition and results of operations. the san antonio msa economy is dependent on the service industry (including tourism), government/military and businesses specializing in international trade. to the extent there is a significant reduction in tourism or in staffing levels of military or other government employers in the san antonio msa, we would expect to see reduced sales of lower priced homes due to a likely reduction in lower paying tourism- and government-related jobs.fluctuations in market conditions may affect our ability to sell our land at expected prices, if at all, which could adversely affect our revenues, earnings and cash flows. we are subject to the potential for significant fluctuations in the market value of our land inventories. there is a lag between the time we acquire control of undeveloped land and the time that we can improve that 9 land for sale to home builders. this lag time varies from site to site as it is impossible to determine in advance the length of time it will take to obtain government approvals and permits. the risk of owning undeveloped land can be substantial as the market value of undeveloped land can fluctuate significantly as a result of changing economic and market conditions. inventory carrying costs can be significant and can result in losses in a poorly performing development or market. material write-downs of the estimated value of our land inventories could occur if market conditions deteriorate or if we purchase land at higher prices during stronger economic periods and the value of those land inventories subsequently declines during weaker economic periods. we could also be forced to sell land or lots for prices that generate lower profit than we anticipate, and may not be able to dispose of an investment in a timely manner when we find dispositions advantageous or necessary. furthermore, a decline in the market vale of our land inventories may give rise to a breach of financial covenants contained in our credit facilities, which could cause a default under one or more of those credit facilities.our operations are subject to an intensive regulatory approval process, including governmental and environmental regulation, which may delay, increase the cost of, prohibit or severely restrict our development projects and reduce our revenues and cash flows. we are subject to extensive and complex laws and regulations that affect the land development process. before we can develop a property, we must obtain a variety of approvals from local, state and federal governmental agencies with respect to such matters as zoning, density, parking, subdivision, site planning and environmental issues. certain of these approvals are discretionary by nature. because certain government agencies and special interest groups have in the past expressed concerns about development plans in or near the central texas region, our ability to develop these properties and realize future income from them could be delayed, reduced, made more expensive or prevented altogether. real estate development is subject to state and federal regulations as well as possible interruption or termination because of environmental considerations, including, without limitation, air and water quality and the protection of endangered species and their habitats. we are making and will continue to make expenditures and other accommodations with respect to our real estate development for the protection of the environment. emphasis on environmental matters may result in additional costs to us in the future or a reduction in the amount of acreage that we can use for development or sales activities.we may be subject to risks as a result of our entry into joint ventures. to the extent that we undertake joint ventures to develop properties or conduct our business, we may be liable for all obligations incurred by the joint venture, even though such obligations may not have been incurred by us, and our share of the potential profits from such joint venture may not be commensurate with our liability. moreover, we will be exposed to greater risks in joint ventures should our co-venturers financial condition become impaired during the term of the joint venture, as creditors will increasingly look to our company to support the operations and fund the obligations of the joint venture.our operations are subject to weather-related risks. our land development operations and the demand for our homebuilder services may be adversely affected from time to time by weather conditions that damage property. the central texas region is prone to tornados, hurricanes entering from the gulf of mexico, floods, hail storms, severe heat and droughts. we maintain only limited insurance coverage to protect the value of our assets against natural disasters. additionally, weather conditions can delay development and construction projects by weeks or months which could delay and decrease our anticipated revenues. to the extent we encounter significant weather-related delays, our business would suffer.the availability of water could delay or increase the cost of land development and adversely affect our future operating results. the availability of water is becoming an increasingly difficult issue in the central texas region and other areas of the southwestern united states. many jurisdictions are now requiring that builders provide detailed information regarding the source of water for any new community that they intend to develop. 10 similarly, the availability of treatment facilities for sanitary sewage is a growing concern. many urban areas have insufficient resources to meet the demand for waste-water and sanitary sewage treatment. to the extent we are unable to find satisfactory solutions to these issues with respect to future development projects, our operations could be adversely affected.we are subject to risks related to environmental damages. we may be required to undertake expensive and time-consuming clean-up or remediation efforts in the event that we encounter environmental hazards on the lots we own, even if we were not originally responsible for or aware of such hazards. in the event we are required to undertake any such remediation activities, our business could suffer.we are at risk of loss for loans or advances to our customers. to the extent we offer surety or financing to our homebuilder customers, we could suffer losses if the funds advanced are not used for their intended purposes and we are forced to exercise legal remedies or incur expenses to recoup our collateral. although we closely monitor the activities for which the money is intended, it is possible for the funds to be wasted or misappropriated. we do not believe we are required to obtain any license to provide these loans or advances, nor are we limited by our charter on the amount of surety or financing we can offer, but regulatory changes could require that we do so in the future.our president and chief executive officer is subject to a non-compete agreement that limits the activities in which we may engage until june 2007. clark n. wilson, our president and chief executive officer, served as the president and chief executive officer of clark wilson homes, inc., a subsidiary of capital pacific holdings, from 1992 to 2002. pursuant to an agreement that was executed in connection with the sale of clark wilson homes to j.m. peters company in 1994, mr.wilson agreed not to engage in the businesses of acquisition, ownership, development, construction or sale of dwelling units in certain portions of the united states in which we plan to do business, including the central texas region, as well as in any other county in the united states in which j.m. peters company conducts business. the stated term of this covenant not-to-compete is five years, expiring in june 2007, for certain enumerated counties in texas, including the counties in and around, austin, dallas, houston and san antonio, texas. the covenant not to compete relates to the business of building homes and not the purchase and sale of real estate as contemplated by us. it is our opinion that our current activities do not violate the terms of the covenant because we do not currently and we do not intend to engage in homebuilding activities until after the covenant terminates in june 2007.we are a small company and have a correspondingly small financial and accounting organization. being a public company may strain our resources, divert managements attention and affect our ability to attract and retain qualified directors. we are a small company with a finance and accounting organization that we believe is of appropriate size to support our current operations; however, the rigorous demands of being a public reporting company may lead to a determination that our finance and accounting group is undersized. as a public company, we are subject to the reporting requirements of the securities exchange act of 1934 and the sarbanes-oxley act of 2002. the requirements of these laws and the rules and regulations promulgated thereunder entail significant accounting, legal and financial compliance costs, and have made, and will continue to make, some activities more difficult, time consuming or costly and may place significant strain on our personnel, systems and resources. the securities exchange act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required. as a result, managements attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. 11 these rules and regulations also have made it more difficult and more expensive for us to maintain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur substantially higher costs to maintain such coverage. if we are unable to maintain adequate director and officer insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent, will be significantly curtailed.we depend on our key personnel to manage our business effectively. we believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial and sales and marketing personnel. in particular, due to the relatively early stage of our business, we believe that our future success is highly dependent on clark n. wilson, our chief executive officer and the founder of wfc, to provide the necessary leadership to execute our growth plans. although we intend to acquire a key-man life insurance policy for mr.wilson, the loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, and in particular sales personnel, could impede our ability to expand our sales and marketing activities as desired, and negatively impact our profitability.we have borrowed money at floating interest rates and if interest rates were to significantly increase, our financial results could suffer. we have borrowed approximately $4.8 million at interest rates of prime plus 0.50% to 2.00% that adjust in relation to the prime rate. if the prime rate were to significantly increase, we will be required to pay additional amounts in interest under these notes and line of credit and our financial results could suffer.we are vulnerable to concentration risks because we intend to focus on the residential rather than commercial market. we intend to focus on residential rather than commercial properties. economic shifts affect residential and commercial property markets, and thus our business, in different ways. a developer with diversified projects in both sectors may be better able to survive a downturn in the residential market if the commercial market remains strong. our focus on the residential sector can make us more vulnerable than a diversified developer.our growth strategy to expand into new geographic areas poses risks. we may expand our business into new geographic areas outside of the central texas region. we will face additional risks if we expand our operations in geographic areas or climates in which we do not have experience, including: adjusting our land development methods to different geographies and climates; obtaining necessary entitlements and permits under unfamiliar regulatory regimes; attracting potential customers in a market in which we do not have significant experience; and the cost of hiring new employees and increased infrastructure costs. we may not be able to successfully manage the risks of such an expansion, which could have a material adverse effect on our revenues, earnings, cash flows and financial condition.if we are unable to generate sufficient cash from operations or secure additional borrowings, we may find it necessary to curtail our development activities. we anticipate that we will need at least $23 million to fund our acquisition and development expenditures for the next twelve months. our performance continues to be substantially dependent on future cash flows from real estate financing and sales and there can be no assurance that we will generate sufficient cash flow or otherwise obtain sufficient funds to meet the expected development plans for our current and 12 future properties. if we are unsuccessful in obtaining adequate loans or in generating positive cash flows, we could be forced to: abandon some of our development activities, including the development of sub-divisions and entitling of land for development; forfeit option fees and deposits; default on loans; violate covenants with our current lenders and convertible note holders thereby putting us in default; and possibly be forced to liquidate a substantial portion of our asset holdings at unfavorable prices.our results of operations and financial condition are greatly affected by the performance of the real estate industry. our real estate activities are subject to numerous factors beyond our control, including local real estate market conditions, substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability and changes in demographic and environmental conditions. real estate markets have historically been subject to strong periodic cycles driven by numerous factors beyond the control of market participants. real estate investments often cannot easily be converted into cash and market values may be adversely affected by these economic circumstances, market fundamentals, competition and demographic conditions. because of the effect these factors have on real estate values, it is difficult to predict with certainty the level of future sales or sales prices that will be realized for individual assets. our real estate operations are also dependent upon the availability and cost of mortgage financing for potential customers, to the extent they finance their purchases, and for buyers of the potential customers existing residences.risks related to investment in our securities there is currently a limited market for our common stock. we have limited trading volume which causes significant stock price fluctuation. any trading market that develops in our common stock may be highly illiquid and may not reflect the underlying value of our net assets or business prospects. our common stock has been traded on the otc bulletin board.we have been approved to have our common stock quoted on the american stock exchange beginning may 15, 2007. however, there is currently only a limited market for our common stock and there can be no assurance that an improved market will ever develop or be sustained. any trading market that does develop may be volatile, and significant competition to sell our common stock in any such trading market may exist, which could negatively affect the price of our common stock, including shares of our common stock issuable upon conversion of our outstanding convertible promissory notes. prior to this offering, we have a minimal number of shares that are freely tradable and therefore our stock price fluctuates significantly based on trades of very small volume. as a result, the value of our common stock may decrease. additionally, if a trading market does develop, such market may be highly illiquid, and our common stock may trade at a price that does not accurately reflect the underlying value of our net assets or business prospects. investors are cautioned not to rely on the possibility that an active trading market may develop or on the prices at which our stock may trade in any market that does develop in making an investment decision.our company is a holding company, and the obligations of our company are subordinate to those of our operating subsidiary. our company is a holding company with no material assets other than our equity interest in our wholly owned subsidiary, wilson family communities, or wfc. wfc conducts substantially all of our operations and directly owns substantially all of our assets. the holding company structure places any obligations of wilson holdings subordinate to those of our operating subsidiary, wfc. therefore, in the event of a liquidation, creditors of wfc would be repaid prior to any distribution to the stockholders of wilson holdings. after the repayment of all obligations incurred by wfc and the repayment of all obligations of wilson holdings, any remaining assets could then be distributed to wilson holdings as the holder of all shares of common stock of wfc and subsequently would be distributed among the holders of our common stock. our largest stockholder, who is also our president and chief executive officer, will continue to control our company. clark n. wilson, our president and chief executive officer, owns or controls approximately 75% of the issued and outstanding shares of our common stock. upon completion of this offering, mr.wilson will continue to own or control approximately 59% of the issued and outstanding shares of our common stock. this ownership position will provide mr.wilson with the voting power to significantly influence the election of all members of our board of directors and, thereby, to exert substantial control over all corporate actions and decisions for an indefinite period.we issued $16.75 million in convertible notes and if these notes are converted into shares of common stock, or if the warrants issued in conjunction with such notes are exercised, our stockholders would suffer substantial dilution. in december 2005 and september 2006, we issued convertible promissory notes which may be converted, at the election of the holders of the notes, into shares of our common stock at a conversion price of $2.00 per share. in conjunction with these note financings, we also issued warrants to the purchasers which have vested and to the placement agent evidencing the right to purchase an aggregate of 1,157,187 shares of our common stock at an exercise price of $2.00 per share. while the holders of these notes and warrants have not indicated to us that they plan to convert their notes into, or exercise their warrants for, shares of our common stock, in the event they elect to do so we would be required to issue up to 8,375,000 additional shares of our common stock in conversion of the notes and 1,157,187 shares of our common stock upon exercise of the warrants, which would be dilutive to our existing stockholders. each convertible note is convertible into shares of our common stock at the option of the holder. the conversion price is subject to adjustment for stock splits, reverse stock splits, recapitalizations and similar corporate actions. a ratchet adjustment in the conversion price, and the corresponding rate at which the convertible notes may be converted into shares of our common stock, also is triggered upon the issuance of certain equity securities or equity-linked securities with a conversion price, exercise price or share price of less than $2.00 per share, provided, that the conversion price cannot be lower than $1.00 per share.future sales or the potential for sale of a substantial number of shares of our common stock could cause the trading price of our common stock to decline and could impair our ability to raise capital through subsequent equity offerings. sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could cause the market price of our stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities. for example, the grant of a large number of stock options or other securities under an equity incentive plan or the sale of our equity securities in private placement transactions at a discount from market value could adversely affect the market price of our common stock.we have anti-takeover provisions that could discourage, delay or prevent our acquisition. provisions of our articles of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable. our authorized but unissued shares of common stock are available for our board to issue without stockholder approval. we may use these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. the existence of our authorized but unissued shares of common stock could render it more difficult or discourage an attempt to obtain control of us by means of a proxy context, tender offer, merger or other transaction. in the future, we may elect to amend our charter to provide for authorized but unissued shares of preferred stock that would be issuable at the discretion of the board of directors. we can amend and restate our charter by action of the board of directors and the written consent of a majority of stockholders. we may become subject to nevadas control share acquisition act (nevada revised statutes 78.378 -78.3793), which prohibits an acquirer, under certain circumstances, from voting shares of a corporations stock after crossing specific threshold ownership percentages, unless the acquirer obtains the approval of the issuing corporations stockholders. the first such threshold is the acquisition of at least one-fifth but less that one-third of the outstanding voting power. wilson holdings may become subject to nevadas control share acquisition 14 act if it has 200 or more stockholders of record at least 100 of whom are residents of the state of nevada and does business in the state of nevada directly or through an affiliated corporation. currently, we do not conduct business in the state of nevada directly or through an affiliated corporation. as a nevada corporation, we also are subject to nevadas combination with interested stockholders statute (nevada revised statutes 78.411 - 78.444) which prohibits an interested stockholder from entering into a combination with the corporation, unless certain conditions are met. an interested stockholder is a person who, together with affiliates and associates, beneficially owns (or within the prior three years, did beneficially own) 10 percent or more of the corporations voting stock. clark n. wilson, our president and chief executive officer, also owns approximately 75% of the issued and outstanding shares of our common stock and will own approximately 59% of our common stock after the offering. all of these factors may decrease the likelihood that we would be, or the perception that we can be, acquired, which may depress the market price of our common stock.NaN21.691482.37NaN16250000NaNFalse2007
33271.0104.0NaN282.227979FT LAUDERDALE8.0000NaN32.638937.36FalseNYSEFalseFalseOtherBusiness ServicesOtherNaNNaNNationsRent Inc0.6302541430000.0Bear Stearns & Co Inc1930.9912.654NaN028NaN8.00NaNFalseNaN06.4767148.750008.750181.348RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to the other information contained in this Prospectus, prospective investors should consider the following factors carefully in evaluating an investment in the Common Stock offered hereby. This Prospectus contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenue and other financial items that are based on the beliefs of, assumptions made by and information currently available to the Company's management. The words "expect," "estimate," "anticipate," "believe," "intend," "plan" and similar expressions and variations thereof are intended to identify forward-looking statements. The cautionary statements set forth in this "Risk Factors" section and elsewhere in this Prospectus identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those expressed in or implied by such forward-looking statements.LIMITED OPERATING HISTORY The Company was formed in August 1997 and commenced operations in September 1997 with its acquisition of Sam's Equipment Rental, Inc. and Gabriel Trailer Manufacturing Company, Inc. (collectively, "Sam's"). Accordingly, the Company has only a limited operating history upon which an evaluation of the Company, its growth strategy and its prospects can be based. The Company's prospects must be evaluated in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development. Although theCompany has experienced growth in revenue and net income recently, there can be no assurance that growth or profitability can or will be sustained or that the Company's strategy of building a network of nationally branded equipment rental locations will lead to growth or profitability. ACQUISITION AND INTEGRATION RISKS Since its inception in August 1997, the Company has acquired 16 equipment rental businesses operating 65 locations in nine states. The Company intends to continue this rapid growth by continuing to make acquisitions, opening new locations and converting acquired locations to the Company's format. There can be no assurance that the Company will be able to identify acquisition candidates or suitable new locations or obtain financing for acquisitions or internal expansion on satisfactory terms, or at all. In the event that suitable acquisition candidates are not identifiable or to the extent that acquisitions are prohibitively costly, the Company may be forced to alter its growth strategy. The Company's growth strategy presents the risks inherent in assessing the value, strengths and weaknesses of growth opportunities, in evaluating the costs and uncertain returns of expanding the operations of the Company, and in integrating acquisitions with existing operations. The Company expects that its growth strategy may affect short-term cash flow and net income as the Company increases the amount of its indebtedness and incurs expenses to open new locations, make acquisitions and expand its rental inventory. As a result, theCompany's revenue and operating results may fluctuate. There can be no assurance that the Company will successfully expand, that any acquired businesses will be successfully integrated into the Company's operations or that any expansion will result in profitability. The failure of the Company to successfully implement its growth strategy may have a material adverse effect on the Company's business, financial condition, results of operations or prospects or the market price of the Common Stock. The Company's anticipated growth will place significant demands on theCompany's management and its operational, financial and marketing resources. In connection with acquisitions and the opening of new locations, the Company anticipates experiencing growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations. The Company believes this growth will increase the operating complexity of theCompany and the level of responsibility exercised by both existing and new management personnel. To manage this expected growth, the Company intends to invest further in its operating and financial systems and to continue to expand, train and manage its employee base. There can be no assurance that the Company will be able to attract and retain qualified management and employees or that the Company's current operating and financial systems and controls will be adequate as the Company grows or that any steps taken to improve such systems and controls will be sufficient. The failure of 10 12 the Company to successfully integrate and manage its growth may have a material adverse effect on the Company's business, financial condition, results of operations or prospects or the market price of the Common Stock. There may be liabilities that the Company fails or is unable to discover in the course of performing due diligence investigations on each company or business it has acquired or seeks to acquire in the future, including liabilities arising from non-compliance with applicable federal, state or local environmental requirements by prior owners and for which the Company, as a successor owner, may be responsible. The Company seeks to minimize the risk by conducting such due diligence, including environmental reviews, as it deems appropriate under the circumstances, but there can be no assurance that reasonable due diligence efforts will result in the identification of all existing conditions or risks. The Company also generally seeks to obtain rights to indemnification from each seller of acquired businesses or properties, which indemnification obligation may be supported by deferring payment of a portion of the purchase price or other appropriate security. However, there can no assurance that such indemnification, even if obtained, will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on the Company's business, financial condition, results of operations or prospects.DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH The Company's ability to remain competitive, sustain its growth and expand its operations through new locations and acquisitions largely depends on its access to capital. In addition, the Company must make ongoing capital expenditures to update and maintain the condition of its rental equipment inventory in order to provide its customers with high-quality equipment. To date, the Company has financed capital expenditures and acquisitions primarily through private equity, bank financing, vendor financing and the issuance of promissory notes. To implement its growth strategy and meet its capital needs, the Company plans to issue additional equity securities and incur additional indebtedness in the future. In addition, the Company may seek to increase its $265 million revolving credit facility (the "Credit Facility") from time to time after consummation of the Offering. The Company intends to use the net proceeds of the Offering to repay borrowings under the Credit Facility and may in the future issue additional equity or debt securities to repay additional outstanding amounts under the Credit Facility. Borrowings under the CreditFacility mature and must be repaid in full in July 2001. There can be no assurance that any of such increases or any additional capital, if and when required, will be available on terms acceptable to the Company, or at all. Failure by the Company to obtain sufficient additional capital in the future could force the Company to curtail its growth or delay capital expenditures, which could have a material adverse effect on the Company's business, financial condition, results of operations or prospects or the market price of the CommonStock. The Company's ability to finance future acquisitions, new locations and internal growth is currently limited by the covenants contained in the Credit Facility, including a number of covenants that, among other things, restrict the ability of the Company to dispose of assets or merge, incur debt, pay dividends, repurchase or redeem capital stock, create liens, make non-rental equipment capital expenditures and make certain investments or acquisitions and otherwise restrict corporate activities. The Credit Facility also contains, among other covenants, requirements that the Company maintain specified financial ratios, including minimum cash flow levels and interest coverage. See "Management'sDiscussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Business -- Growth Strategy" and "Description of Certain Indebtedness." SUBSTANTIAL LEVERAGE The Company has a substantial amount of indebtedness. As of March 31, 1998, on a pro forma basis after giving effect to the Acquisitions, an additional equity contribution of $17.4 million from the Company's founders (the "Founders'Additional Contribution"), a $27.6 million private placement of shares of Common Stock (the "Private Placement"), certain borrowings under the Credit Facility, the Offering and the application of the estimated net proceeds therefrom, the Company would have had total indebtedness of approximately $191.3 million. 11 13 The degree to which the Company is leveraged could have important consequences to holders of the Common Stock including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes may be limited; (ii) a substantial portion of theCompany's cash flow from operations will be dedicated to the payment of the principal of, and interest on, its indebtedness; (iii) the agreements governing the Company's long-term indebtedness will contain certain restrictive financial and operating covenants that could limit the Company's ability to compete and expand; and (iv) the Company's substantial leverage may make it more vulnerable to economic downturns, limit its ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic conditions. See "Capitalization," "Management's Discussion and Analysis ofFinancial Condition and Results of Operations -- Liquidity and Capital Resources," "Description of Certain Indebtedness" and the Consolidated Financial Statements included elsewhere in this Prospectus. COMPETITION The equipment rental industry is highly competitive. The Company's competitors include large national rental companies, equipment manufacturers, regional corporations, smaller independent businesses, and equipment vendors and dealers who both sell and rent equipment to customers. Some of the Company's competitors have greater financial resources, are more geographically diverse, and have greater name recognition than the Company. There can be no assurance that the Company will not encounter increased competition from existing competitors or new market entrants, such as equipment manufacturers, that may be significantly larger and have greater financial and marketing resources than theCompany. If existing or future competitors reduce prices to gain or retain market share and the Company must also reduce prices to remain competitive, it could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. Additionally, existing or future competitors may seek to compete with the Company for acquisition candidates or new locations, which may have the effect of increasing acquisition prices and reducing the number of suitable acquisition candidates or expansion locations which could have a material adverse effect on the Company's growth strategy, its business, financial condition, results of operations or prospects or the market price of the Common Stock. See "Business -- Competition."SEASONALITY AND QUARTERLY FLUCTUATIONS IN REVENUE AND OPERATING RESULTS Many of the Company's current locations are in the Midwest region of the United States. During the winter months of December through March, the Company experiences a slowdown in rentals to construction customers as a result of adverse weather conditions. In addition, the Company's revenue and operating results have varied throughout the year and are expected to continue to fluctuate in the future due to a number of factors, including (i) general economic conditions in the Company's markets, (ii) the timing of acquisitions and new location openings and related costs, (iii) the effectiveness of integrating acquired businesses and new locations, (iv) rental patterns of theCompany's customers and (v) price changes in response to competitive factors. The Company incurs various costs in establishing or integrating newly acquired or opened locations, and the profitability of a new location is generally expected to be lower in the initial months of operation. LIABILITY AND INSURANCE The Company's business exposes it to possible claims for personal injury or death resulting from the use of equipment rented or sold by the Company and from injuries caused in motor vehicle accidents in which Company delivery and service personnel are involved. The Company carries comprehensive insurance subject to deductibles at levels it believes are sufficient to cover existing and future claims. Although the Company has not experienced any material losses that were not covered by insurance, there can be no assurance that existing or future claims will not exceed the level of the Company's insurance or that such insurance will continue to be available on economically reasonable terms, or at all. 12 14ENVIRONMENTAL AND SAFETY REGULATION The Company's equipment, facilities and operations are subject to certain federal, state and local laws and regulations relating to environmental protection and occupational health and safety, including those governing wastewater discharges, the use, treatment, storage and disposal of solid and hazardous wastes and materials, air quality and the remediation of contamination associated with the release of hazardous substances. Certain of the Company's existing and former locations use and have used, substances, and currently generate or have generated or disposed of wastes, which are or may be considered hazardous or otherwise are subject to applicable environmental requirements. In particular, the Company stores and dispenses, or has in the past stored and dispensed, petroleum products from aboveground storage tanks and, in certain cases, underground storage tanks at its locations. The Company also uses hazardous materials, including solvents, to clean and maintain equipment, and generates and disposes of solid and hazardous wastes, including batteries, used motor oil, radiator fluid and solvents. In connection with such activities, theCompany has incurred minimal capital expenditures and other compliance costs which are expensed on a current basis and which, to date, have not been material to the Company's financial condition. Based on currently available information, the Company believes that the possibility is remote that it will have to incur material capital expenditures or other material compliance or remediation costs for environmental and safety matters in the foreseeable future. There can be no assurance, however, that environmental and safety requirements will not become more stringent or be interpreted and applied more stringently in the future, or that the Company will not identify adverse environmental conditions that are not currently known to the Company. Such future changes or interpretations, or the identification of such adverse environmental conditions, could result in additional environmental compliance or remediation costs not currently anticipated by the Company, which could have a material adverse effect on theCompany's business, financial condition, results of operations or prospects or the market price of the Common Stock. See "Business -- Environmental and Safety Regulation." DEPENDENCE ON EXECUTIVE OFFICERS AND DIRECTORS The Company's future success depends to a significant extent on retaining the services of certain executive officers and directors. The Company does not maintain key man insurance. The loss of the services of key employees or directors (whether such loss is through resignation or other causes) or the inability to attract additional qualified personnel could have a material adverse effect on the Company's business, financial condition, results of operations or prospects or the market price of the Common Stock.SIGNIFICANT STOCKHOLDERS Following the Offering, the executive officers and directors of the Company, including H. Wayne Huizenga, will own approximately 37.8% of the outstanding Common Stock (36.2% if the Underwriters' over-allotment option is exercised in full). In addition, H. Family Investments, Inc., a Florida corporation controlled by H. Wayne Huizenga, Jr., Mr. Huizenga's son, will own approximately 27.8% of the outstanding Common Stock (26.6% if the Underwriter's over-allotment option is exercised in full). Additionally, the HuizengaInvestors are expected to purchase in the Offering an aggregate of 3,125,000 shares of Common Stock, which will represent approximately 7.2% of the outstanding Common Stock (6.9% if the Underwriters' over-allotment option is exercised in full). As a result, the executive officers and directors of the Company will, together with H. Family Investments, Inc. and the HuizengaInvestors, be able to exercise a controlling influence over the outcome of matters submitted to the Company's stockholders for approval, including the election of directors. SHARES ELIGIBLE FOR FUTURE SALE Immediately following the consummation of the Offering, the Company will have 43,118,694 shares of Common Stock outstanding (45,068,694 shares if theUnderwriters' over-allotment option is exercised in full), including 30,118,694 outstanding shares of Common Stock presently beneficially owned by existing stockholders. The 13,000,000 shares of Common Stock to be sold pursuant to the Offering (14,950,000 shares if the Underwriters' over-allotment option is exercised in full) will be eligible for sale without restriction under theSecurities Act in the public market after the consummation of the Offering by persons other than affiliates 13 15 of the Company. Sales of shares by "affiliates" of the Company, as the term is defined in Rule 144 under the Securities Act ("Affiliates"), will be subject to Rule 144. The Company and the officers, directors and certain security holders of the Company, who will beneficially own in the aggregate 30,118,694 outstanding shares and securities convertible into or exercisable for 6,223,750 shares of Common Stock immediately prior to the consummation of the Offering, have agreed with the Underwriters (the "Lock-up Agreements") not to offer, sell or otherwise dispose of any shares of Common Stock or any security convertible into, exercisable for or exchangeable for shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent ofBear, Stearns & Co. Inc., except that (i) stockholders may make transfers as gifts if the donee agrees to be bound by a Lock-up Agreement, (ii) certain security holders will be permitted to pledge or margin their shares in a bona fide loan transaction with a third party lender, (iii) the Company may at any time and from time to time issue shares of Common Stock to third parties as consideration for the Company's acquisition from such third parties of equipment rental businesses and (iv) the Company may issue options pursuant to the 1998Stock Option Plan and shares of Common Stock upon the exercise of certain options granted to non-employee directors. The Company may issue shares of Common Stock in connection with acquisitions prior to the expiration of the 180-day lock-up period. The Company is not aware of any officer, director or other security holder that plans to offer or sell any shares of Common Stock prior to the expiration of the 180-day lock-up period. Following the expiration or waiver of the foregoing restrictions on dispositions and any applicable holding periods under Rule 144, 30,118,694 outstanding shares of Common Stock owned by existing stockholders will be available for sale in the public market pursuant to Rule 144 (including the volume and other limitations set forth therein). In connection with the PrivatePlacement, the Company agreed to use its reasonable efforts following consummation of the Offering to register for resale shares of Common Stock issued in the Private Placement. In addition, in connection with certain of the Acquisitions, the Company has agreed to register for resale the shares of Common Stock issuable upon exercise of certain warrants and upon conversion of certain convertible promissory notes. The Company has filed a registration statement to register for resale on a continuous basis from time to time, subject to theLock-up Agreements, 36,342,444 shares of Common Stock, 30,118,694 shares of which are held by the Company's existing stockholders and 6,223,750 shares of which are issuable upon exercise or conversion of outstanding warrants and convertible promissory notes. The Company caused this registration statement to become effective prior to the consummation of the Offering and intends to maintain its continuous effectiveness, including through filing post-effective amendments, indefinitely. The purpose of this resale registration statement is to provide liquidity to the selling stockholders named therein, some of whom will have the ability to pledge or margin their shares of Common Stock in connection with a bona fide loan transaction with a third party lender. The shares of Common Stock covered by this resale registration statement are freely tradeable subject to the Lock-up Agreements, which prohibit the selling stockholders from selling or otherwise disposing of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Bear, Stearns & Co. Inc. In addition, the Company intends to register on a registration statement on Form S-8 shares of Common Stock reserved for issuance upon exercise of options that may be granted to certain employees and non-employee directors under the 1998 Stock Option Plan and otherwise. TheCompany may also from time to time file registration statements covering the issuance and/or resale of shares of Common Stock which may be issued in potential future acquisitions. See "Management -- Stock Option Plan," "Description of Certain Indebtedness -- Promissory Notes" and "Description of Capital Stock -- Warrants and Options." No prediction can be made as to the effect, if any, that market sales of shares held by the Company's existing stockholders or future stockholders, or the availability of such shares for future sales, or market sales of shares sold in the Offering pursuant to this Prospectus or the availability of such shares for future sales, will have on the market price of the Common Stock from time to time. Sales of significant amounts of Common Stock in the public market could materially adversely affect the market price of the Common Stock or could materially impair the Company's future ability to realize capital through an offering of equity securities. See "Shares Eligible for Future Sale." 140.01176230.151140.801075.812104000000236.398False1998
33284.0130.03000.099.401897SANTA CLARA17.31250.88798.8010609.55FalseNASDQTrueFalseHealthcare, Medical Equipment, and DrugsMedical EquipmentHealthcare, Medical Equipment, and Drugs152749.9130000000.0Align Technology Inc0.0123751800000.0Deutsche Banc Alex Brown2640.57-97.47422.022311.013.000.413043False152749.916.0443049.001009.001139.019RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect usIf any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment. Risks Related to Our Business Since we have a history of losses and negative cash flows, and we expect our operating expenses to continue to increase, we may not achieve or maintain profitability in the futureWe have incurred significant operating losses and have not achieved profitability. We have incurred net losses of $73.2 million for the period from our inception in April 1997 through September 30, 2000, including a net loss of $15.4 million in 1999 and $53.3 million for the nine months ended September 30, 2000. We incurred negative cash flows of $11.6 million from operating activities in 1999 and $31.2 million for the nine months ended September 30, 2000. From inception through July 2000, we have spent significant funds in organizational and start-up activities, to recruit key managers and employees, to develop the Invisalign System and to develop our manufacturing and customer support resources. We have also spent significant funds on clinical trials and training programs to train orthodontists in the use of the Invisalign System. We expect to have net losses and negative operating cash flows for at least the next 18 monthsWe intend to increase our operating expenses as we continue to: . scale our manufacturing operations; . develop new software and increase the automation of our manufacturing processes; . execute our national direct to consumer marketing campaign; . increase the size of our sales force and orthodontist training staff; . undertake quality assurance and improvement initiatives; and . increase our general and administrative functions to support our growing operationsAs a result, we will need to increase our revenue significantly, while controlling our expenses, to achieve profitability. It is possible that we will not achieve profitability, and even if we do achieve profitability, we may not sustain or increase profitability in the future. We have a limited operating history and expect our future financial results to fluctuate significantly, which may cause our stock price to declineWe were incorporated in April 1997 and have only recently begun selling our Invisalign System in commercial quantities. Thus, we have a limited operating history which makes an evaluation of our future prospects and your investment in our stock difficult. In addition, we expect our future quarterly and annual operating results to fluctuate as we increase our commercial sales. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include: . changes in the timing of product orders; . unanticipated delays in production caused by insufficient capacity or in the introduction of new production processes; 5 . inaccurate forecasting of revenue, production and other operating costs; and . the development and marketing of directly competitive products by potential competitorsTo respond to these and other factors, we may need to make business decisions that could adversely affect our operating results. Most of our expenses, such as employee compensation and lease payment obligations, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our revenue for a particular period fall below our expectations, we may be unable to adjust spending quickly enough to offset any unexpected shortfall in revenue growth or any decrease in revenue levelsDue to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for any one quarter as an indication of our future performance. We have limited product offerings, and if demand for our Invisalign System declines or fails to develop as we expect, our revenue will declineWe derive a substantial portion of our revenue from the sale of our Invisalign System. For the nine-month period ended September 30, 2000, we derived 71% of our revenue from the sale of our Invisalign System. We expect that revenue from the sale of our Invisalign System will continue to account for a substantial portion of our total revenue. Continued and widespread market acceptance of our System is critical to our future success. The Invisalign System may not achieve market acceptance at the rate at which we expect, or at all, which could reduce our revenue. If orthodontists do not adopt our Invisalign System in sufficient numbers or as rapidly as we anticipate, our operating results will be harmedAs of November 30, 2000, approximately 2,000 of the 5,300 orthodontists we had trained had submitted one or more cases to us. Our success depends upon increasing acceptance by orthodontists and dentists of the Invisalign System. The Invisalign System requires orthodontists and their staff to undergo special training and learn to interact with patients in new ways and to interact with us as a supplier. In addition, because our Invisalign System has only been in clinical testing since July 1997 and commercially available since July 1999, orthodontists may be reluctant to adopt it until more historical clinical results are available. Also, increasing adoption by orthodontists will depend on factors such as the capability, safety, efficacy, ease of use, price, quality and reliability of our products and our provision of effective sales support, training and service. In the future, unanticipated poor clinical performance of the Invisalign System could result in significant adverse publicity and consequently in reduced acceptance by orthodontists. If our Invisalign System does not achieve growing acceptance in the orthodontic and dental communities, our operating results will be harmed. If consumers do not adopt our Invisalign System in sufficient numbers or as rapidly as we anticipate, our operating results will be harmedOur Invisalign System represents a significant change from traditional orthodontic treatment, and patients may be reluctant to accept it or may not find it preferable to conventional treatment. In addition, patients may not comply with recommended treatment 6 guidelines which could compromise the effectiveness of their treatment. While we have generally received positive feedback from both orthodontists and patients regarding our Invisalign System as both an alternative to braces and as a clinical method for treatment of malocclusion, our success will depend upon the rapid acceptance of our System by the substantially larger number of potential patients to which we are now actively marketing. We have had a limited number of complaints from patients and prospective patients generally related to shipping delays and minor manufacturing irregularities. Market acceptance will depend in part upon the recommendations of dentists and orthodontists, as well as other factors including effectiveness, safety, reliability, improved treatment aesthetics and greater comfort and hygiene compared to conventional orthodontic products. Furthermore, consumers may not respond to our direct marketing campaigns or we may be unsuccessful in reaching our target audience. If consumers prove unwilling to adopt our Invisalign System as rapidly or in the numbers that we anticipate, our operating results will be harmed. Our success depends in part on our proprietary technology and if we are unable to successfully enforce our intellectual property rights, our competitive position may be harmedOur success will depend in part on our ability to maintain existing intellectual property and to obtain and maintain further intellectual property protection for our products, both in the U.S. and in other countries. Our inability to do so could harm our competitive position. We have one issued U.S. patent and 46 pending U.S. patent applications. We have two foreign-issued patents and 111 pending foreign patent applications. We intend to rely on our portfolio of issued and pending patent applications in the U.S. and in other countries to protect a large part of our intellectual property and our competitive position. However, our currently pending or future patent filings may not issue as patents. Additionally, any patents issued to us may be challenged, invalidated, held unenforceable, circumvented, or may not be sufficiently broad to prevent third parties from producing competing products similar in design to our products. In addition, protection afforded by foreign patents may be more limited than that provided under U.S. patents and intellectual property lawsWe also rely on protection of copyrights, trade secrets, know-how and proprietary information. We generally enter into confidentiality agreements with our employees, consultants and our collaborative partners upon commencement of a relationship with us. However, these agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information and adequate remedies may not exist if unauthorized use or disclosure were to occur. Our inability to maintain the proprietary nature of our technology through patents, copyrights or trade secrets would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. In particular, a failure of our proprietary rights might allow competitors to copy our technology, which could adversely affect pricing and market share. If we infringe the patents or proprietary rights of other parties, our ability to grow our business will be severely limitedExtensive litigation over patents and other intellectual property rights is common in the medical device industry. We have been sued for infringement of another party's patent in the past and, while that action has been dismissed, we may be the subject of patent or other litigation in the future In January 2000, Ormco Corporation filed suit against us asserting an infringement of U.S. Patent Nos. 5,447,432 and 5,683,243. The complaint sought unspecified monetary damages and equitable relief. The complaint alleged that the Invisalign System infringed certain claims of the two patents relating to computer modeling of an ideal dentition and the production of 7 orthodontic appliances based upon the ideal dentition. The suit has been dismissed but can be recommenced under certain circumstances. See "Business-- Legal Proceedings." If the Ormco suit were recommenced and if Ormco were to prevail, we would have to seek a license from Ormco, which license might not be available on commercially reasonable terms or at all. In that event, we could be subject to damages or an injunction which could materially adversely affect our businessFrom time to time, we have received and may again receive letters from third parties drawing our attention to their patent rights. While we do not believe that we infringe any valid and enforceable rights which have been brought to our attention, there may be other more pertinent rights of which we are presently unaware. The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An adverse determination in a patent suit by Ormco or in any other litigation or interference proceeding to which we may become a party could subject us to significant liabilities. An adverse determination of this nature could also put our patents at risk of being invalidated or interpreted narrowly or require us to seek licenses from third parties. Licenses may not be available on commercially reasonable terms or at all, in which event, our business would be materially adversely affected. We have limited experience in manufacturing our products and if we encounter manufacturing problems or delays, our ability to generate revenue will be limitedWe have manufactured a limited number of our products to date. Our manufacturing processes rely on complex three-dimensional scanning, geometrical manipulation and modeling technologies that have historically not been used on the scale we require. Each item that we manufacture is geometrically unique and we have not manufactured our products in the commercial volumes which will be required to make us profitable. Accordingly, we may be unable to establish or maintain reliable, high-volume manufacturing capacity. Even if this capacity can be established and maintained, the cost of doing so may increase the cost of our products. We may encounter difficulties in scaling up production to meet demand, including: . problems involving production yields; . shortages of key manufacturing equipment; . shortages of qualified personnel, in particular dental and orthodontic personnel; . failure to develop new software processes; and . compliance with applicable Quality System regulations enforced by the Food and Drug Administration, or FDAOur manufacturing process is complex. Since all our products are designed for individual patients, we manufacture our products to fill purchase orders rather than maintaining inventories of assembled products. If demand for our products exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders. If we are unable to establish and maintain larger- scale manufacturing capabilities, our ability to generate revenue will be limited and our reputation in the marketplace would be damaged. We currently rely on third parties to provide key inputs to our manufacturing process, and if our access to these inputs is diminished, our business may be harmedWe currently outsource key portions of our manufacturing process. We rely on a third party manufacturer in Mexico to fabricate Aligners and to ship the completed product to customers. In addition, third party rapid prototyping bureaus fabricate some molds from which 8 the Aligners are formed. As a result, if any of our third party manufacturers fail to deliver their components or if we lose their services, we may be unable to deliver our products in a timely manner and our business may be harmed. Finding substitute manufacturers may be expensive, time-consuming or impossible. Although we are in the process of developing the capability to fabricate all molds and Aligners internally, we may not be successful and may continue to rely on outsourcing in the futureIn addition, we are highly dependent on manufacturers of specialized scanning equipment, rapid prototyping machines, resin and other advanced materials. We maintain single supply relationships for many of these machines and materials technologies. Our rapid growth may exceed the capacity of these manufacturers to produce the needed equipment and materials in sufficient quantities to support our growth. In the event of delivery delays or shortages of these items, our business and growth prospects may be harmed. We are dependent on our international manufacturing operations, which exposes us to foreign operational and political risks that may harm our businessTwo of our key production steps are performed in manufacturing operations located outside the U.S. We currently rely on our facilities in Pakistan to create electronic treatment plans with the assistance of sophisticated software. We employ approximately 650 people in Lahore, Pakistan in this effort. We anticipate that we will need to expand our personnel and facilities in Pakistan in order to scale our manufacturing operations. In addition, we rely on third party manufacturers in Mexico to fabricate Aligners and to ship the completed product to customers. Our reliance on international operations exposes us to risks and uncertainties, including: . difficulties in staffing and managing international operations; . controlling quality of manufacture; . political, social and economic instability; . interruptions and limitations in telecommunication services; . product or material transportation delays or disruption; . trade restrictions and changes in tariffs; . import and export license requirements and restrictions; . fluctuations in currency exchange rates; and . potential adverse tax consequencesIf any of these risks materialize, our operating results may be harmed. We are growing rapidly, and our failure to manage this growth could harm our business We have experienced significant growth in recent periods. Our headcount increased from 50 employees as of June 30, 1999 to approximately 1,080 employees as of November 30, 2000. In mid-2000, we approved major expansions to our existing facilities and the building of new facilities. We expect that our growth will place significant demands on our management and other resources and will require us to continue to develop and improve our operational, financial and other internal controls both in the U.S. and internationally. In particular, continued growth increases the challenges involved in a number of areas, including: recruiting and retaining sufficient skilled personnel, providing adequate training and supervision to maintain our high quality standards, and preserving our culture and values. Our inability to manage this growth effectively would harm our business. 9 If we lose our key personnel or are unable to attract and retain key personnel, we may be unable to pursue business opportunities or develop our productsWe are highly dependent on the key employees in our clinical engineering and management teams. The loss of the services of those individuals may significantly delay or prevent the achievement of our product development and other business objectives and could harm our business. Our future success will also depend on our ability to identify, recruit, train and retain additional qualified personnel. There is currently a shortage of skilled clinical, engineering and management personnel and intense competition for these personnel, especially in Silicon Valley where our headquarters is located. In addition, few orthodontists are accustomed to working in a manufacturing environment since they are generally trained to work in private practices, universities and other research institutions. Thus, we may be unable to attract and retain personnel with the advanced qualifications necessary for the further development of our business. Furthermore, we may not be successful in retaining our key personnel or their services. We experience competition from manufacturers of traditional braces and expect aggressive competition in the futureWe are not aware of any company that is marketing or developing a system directly comparable to our Invisalign System. However, manufacturers of traditional braces, such as 3M Company, Sybron International Corporation and Dentsply International, Inc. have substantially greater financial resources and manufacturing and marketing experience than we do and may, in the future, attempt to develop an orthodontic system similar to ours. Large consumer products companies may also enter the orthodontic supply market. Furthermore, we may face competition in the future from new companies that may introduce new technologies. We may be unable to compete with these competitors and one or more of these competitors may render our technology obsolete or economically unattractive. If we are unable to compete effectively with existing products or respond effectively to any products developed by our competitors, our business will be harmed. Complying with the Food and Drug Administration and other regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penaltiesOur products are medical devices and subject to extensive regulation in the U.S. and internationally. FDA regulations are wide ranging and govern, among other things: . product design, development, manufacture and testing; . product labeling; . product storage; . premarket clearance or approval; . advertising and promotion; and . product sales and distributionNoncompliance with applicable regulatory requirements can result in enforcement action which may include recalling products, ceasing product marketing, and paying significant fines and penalties, which could limit product sales, delay product shipment and adversely affect our profitability In the U.S. we must comply with facility registration and product listing requirements of the FDA and adhere to applicable Quality System regulations. The FDA enforces its Quality 10 System regulations through periodic unannounced inspections, which we have yet to undergo. If we or any third party manufacturer of our products do not conform to applicable Quality System regulations, we may be required to find alternative manufacturers, which could be a long and costly processBefore we can sell a new medical device in the U.S., we must obtain FDA clearance or approval, which can be a lengthy and time-consuming process. Even though the devices we market have obtained the necessary clearances from the FDA through the premarket notification provisions of Section 510(k) of the federal Food, Drug, and Cosmetic Act, we may be unable to maintain the necessary clearances in the future. Furthermore, we may be unable to obtain the necessary clearances for new devices that we market in the future. Please see "Business--Government Regulation" for a more detailed discussion of the regulations that govern our industry. Extensive and changing government regulation of the healthcare industry may be expensive to comply with and exposes us to the risk of substantial government penaltiesIn addition to medical device laws and regulations, numerous state and federal healthcare-related laws regulate our business, covering areas such as: . storage, transmission and disclosure of medical information and healthcare records; . prohibitions against the offer, payment or receipt of remuneration to induce referrals to entities providing healthcare services or goods; and . the marketing and advertising of our productsComplying with these laws and regulations could be expensive and time- consuming, and could increase our costs or reduce or eliminate certain of our activities or our revenues. See "Business--Government Regulation." We face risks related to our international operations, including the need to obtain necessary foreign regulatory clearance or approvals Sales of our products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain clearances or approvals required by other countries may be longer than that required for FDA clearance or approval, and requirements for such approvals may differ from FDA requirements. We may be unable to obtain regulatory approvals in other countries. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals. If we experience delays in receipt of approvals to market our products outside of the U.S., or if we fail to receive these approvals, we may be unable to market our products or enhancements in international markets in a timely manner, if at all. Our business exposes us to risks of product liability claims, and we may incur substantial expenses if we are sued for product liabilityMedical devices involve an inherent risk of product liability claims and associated adverse publicity. We may be held liable if any product we develop or any product that uses or incorporates any of our technologies causes injury or is otherwise found unsuitable. Although we intend to continue to maintain product liability insurance, adequate insurance may not be available on acceptable terms and may not provide adequate coverage against potential liabilities. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. These costs would have the effect of increasing our expenses and could harm our business. 11 We may be unable to raise additional capital if it should be necessary, which could harm our ability to competeWe expect to expend significant capital to establish a national brand, build manufacturing infrastructure and develop both product and process technology. These initiatives may require us to raise additional capital over the next few years. We believe that the proceeds from this offering and the capital that we have already raised should be sufficient to fund our operations for at least the next 12 months. However, we may consume available resources more rapidly than anticipated and we may not be able to raise additional funds when needed, or on acceptable terms. Risks Related to this Offering The market price for our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering priceBefore this offering, there has not been a public market for our common stock. An active trading market for our common stock may not develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active. Further, the market price of our common stock may decline below the price you paid for your shares. The initial public offering price for the shares was determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Please see "Underwriting" for more information regarding our arrangement with the underwriters and the factors considered in setting the initial public offering priceThe trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: . quarterly variations in our results of operations; . changes in recommendations by the investment community or in their estimates of our revenues or operating results; . speculation in the press or investment community; . strategic actions by our competitors, such as product announcements or acquisitions; and . general market conditionsIn addition, the stock market in general, and the market for technology and medical device companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated to or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performanceIn the past, following periods of volatility in the market price of a company's securities, class action litigation has often been brought against the company. If a securities class action suit is filed against us, we would incur substantial legal fees and our management's attention and resources would be diverted from operating our business in order to respond to the litigation. The large number of shares eligible for public sale after this offering could cause our stock price to declineThe market price of our stock could decline as a result of sales by our existing stockholders of a large number of shares of our stock in the market after this offering or the 12 perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriateAfter this offering, we will have 45,616,402 shares of common stock outstanding. All of our officers and directors and substantially all of our existing stockholders have entered into lock-up agreements providing that they will not sell any of our common stock until 180 days from the date of this prospectus, without the prior written consent of Deutsche Banc Alex. Brown Inc. Deutsche Banc Alex. Brown Inc. may release the shares subject to the lock-up agreements in whole or in part at any time without prior public notice. However, Deutsche Banc Alex. Brown Inc. has no current plans to effect such a release. Please see "Shares Eligible for Future Sale" for a description of sales that may occur in the future. Our management has broad discretion in using the proceeds from this offering, which might not be used in ways that improve our operating results or increase our market valueOur management will have broad discretion as to how the net proceeds of this offering will be used, including uses which may not improve our operating results or increase our market value. Investors will rely on the judgment of management regarding the application of the proceeds of this offering. Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us more difficultProvisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions: . prevent stockholders from taking action by written consent; . limit the persons who may call special meetings of stockholders; . authorize the issuance of preferred stock in one or more series; and . require advance notice for stockholder proposals and director nominationsIn addition, Section 203 of the Delaware General Corporation Law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. Please see "Description of Capital Stock--Preferred Stock" and "Description of Capital Stock--Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law" for a more detailed discussion of these anti-takeover provisions. Concentrations of ownership and agreements among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate transactionsThe interest of management could conflict with the interest of our other stockholders. Upon completion of this offering, our executive officers, directors and principal stockholders will beneficially own, in total, approximately 62% of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change of control of Align, which in turn could reduce the market price of our stock. 13 New investors in our common stock will experience immediate and substantial dilutionThe offering price of our common stock will be substantially higher than the net tangible book value per share of our existing capital stock. As a result, if you purchase common stock in this offering, you will incur immediate and substantial dilution of $8.52 in net tangible book value per share of common stock, based on the public offering price of $13.00 per share. You will also experience additional dilution upon the exercise of outstanding stock options and warrants. Please see "Dilution" for a more detailed discussion of the dilution new investors will incur in this offering. 14-0.82452821.921326.82118.21813000000046.384True2001
33294.037.35000.089.367970REDWOOD CITY7.1400-0.82798.9310471.47FalseNASDQTrueTrueHealthcare, Medical Equipment, and DrugsPharmaceutical ProductsHealthcare, Medical Equipment, and Drugs146171.037333331.0Threshold Pharmaceuticals Inc0.003732522666.0Banc of America Securities LLC\nCIBC World Markets Inc2045.88-44.40817.00415.07.000.447205False146171.008.0010008.001008.00132.004risk factors any investment in our stock involves a high degree of risk. you should consider carefully the risks and uncertainties described below and all information contained in this prospectus, before you decide whether to purchase our common stock. the trading price of our common stock could decline due to any of these risks or uncertainties, and you may lose part or all of your investment. risks related to our business risks related to drug discovery, development and commercialization we are substantially dependent upon the success of our glufosfamide and th-070 product candidates. pivotal clinical trials for our products may not demonstrate efficacy or lead to regulatory approval. our product candidates must undergo rigorous clinical testing, the results of which are uncertain and could substantially delay or prevent us from bringing them to market. before we can obtain regulatory approval for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the fda or other regulatory agencies. clinical trials of new drug candidates sufficient to obtain regulatory marketing approval are expensive and take years to complete. 8 we cannot assure you that we will successfully complete clinical testing within the time frame we have planned, or at all. we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following: our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing or to abandon programs; the results obtained in earlier stage testing may not be indicative of results in future trials; trial results may not meet the level of statistical significance required by the fda or other regulatory agencies; enrollment in our clinical trials for our product candidates may be slower than we anticipate, resulting in significant delays; we, or regulators, may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks; and the effects of our product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use, if approved. completion of clinical trials depends, among other things, on our ability to enroll a sufficient number of patients, which is a function of many factors, including: the therapeutic endpoints chosen for evaluation; the eligibility criteria defined in the protocol; the size of the patient population required for analysis of the trials therapeutic endpoints; our ability to recruit clinical trial investigators with the appropriate competencies and experience; our ability to obtain and maintain patient consents; and competition for patients by clinical trial programs for other treatments. we may experience difficulties in enrolling patients in our clinical trials, which could increase the costs or affect the timing or outcome of these trials. this is particularly true with respect to diseases with relatively small patient populations, such as pancreatic cancer, which is an indication for our glufosfamide product candidate.we are subject to significant regulatory approval requirements, which could delay, prevent or limit our ability to market our product candidates. the fast track designation for development of glufosfamide for the treatment of refractory pancreatic cancer may not lead to a faster development or regulatory review or approval process. if a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for fda fast track designation for a particular indication. marketing applications filed by sponsors of products in fast track development may qualify for expedited fda review under the policies and procedures offered by the fda, but the fast track designation does not assure any such qualification. although we have obtained a fast track designation from the fda for glufosfamide for the treatment of refractory pancreatic cancer, we may not experience a faster development process, review or approval compared to drugs considered for approval under conventional fda procedures. in addition, the fda may withdraw our fast track designation at any time. if we lose our fast track designation, the approval process may be delayed. in addition, our fast track designation does not guarantee that we will qualify for or be able to take advantage of the expedited review procedures and does not increase the likelihood that glufosfamide will receive regulatory approval for the treatment of refractory pancreatic cancer.our product candidates are based on metabolic targeting, which is an unproven approach to therapeutic intervention. all of our product candidates are based on metabolic targeting, a therapeutic approach that targets fundamental differences in energy metabolism between normal and certain diseased cells. we have not, nor to our knowledge has any other company, received regulatory approval for a drug based on this approach. there can be no assurance that our approach will lead to the development of approvable or marketable drugs. in addition, the fda or other regulatory agencies may lack experience in evaluating the safety and efficacy of drugs based on metabolic targeting, which could lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our product candidates.our product candidates may have undesirable side effects that prevent their regulatory approval or limit their use if approved. glufosfamide is known to cause reversible toxicity to the bone marrow and kidneys, as well as nausea and vomiting. th-070, which we are developing to treat patients with bph, has been investigated as a male contraceptive and is known to cause reversible effects on fertility in animals. in human clinical trials at doses significantly higher than the dose of th-070 we contemplate investigating for bph, muscle and testicular pain have been observed. these side effects or others that could be identified in the course of our clinical trials or that may otherwise be associated with our product candidates may outweigh the benefits of our product candidates and prevent regulatory approval or limit their market acceptance if they are approved.delays in clinical testing could result in increased costs to us and delay our ability to obtain regulatory approval and commercialize our product candidates. significant delays in clinical testing could materially impact our product development costs and delay regulatory approval of our product candidates. we do not know whether planned clinical trials will begin on 10 time, will need to be redesigned or will be completed on schedule, if at all. clinical trials can be delayed for a variety of reasons, including delays in: obtaining regulatory approval to commence a trial; obtaining clinical materials; reaching agreement on acceptable clinical study agreement terms with prospective sites; obtaining institutional review board approval to conduct a study at a prospective site; and recruiting patients to participate in a study.orphan drug exclusivity affords us limited protection, and if another party obtains orphan drug exclusivity for the drugs and indications we are targeting, we may be precluded from commercializing our product candidates in those indications. we intend to seek orphan drug designation for the cancer indications that our glufosfamide and 2dg product candidates are intended to treat. under the orphan drug act, the fda may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is defined by the fda as a disease or condition that affects fewer than 200,000 individuals in the united states. the company that obtains the first fda approval for a designated orphan drug indication receives marketing exclusivity for use of that drug for that indication for a period of seven years. orphan drug exclusive marketing rights may be lost if the fda later determines that the request for designation was materially defective, or if the manufacturer is unable to assure sufficient quantity of the drug. orphan drug designation does not shorten the development or regulatory review time of a drug, but does provide limited advantages in the regulatory review and approval process. because the prevalence of bph is greater than 200,000 individuals in the united states, th-070 for the treatment of symptomatic bph is not eligible for orphan drug designation and we cannot rely on this protection to provide marketing exclusivity. orphan drug exclusivity may not prevent other market entrants. a different drug, or, under limited circumstances, the same drug may be approved by the fda for the same orphan indication. the limited circumstances are an inability to supply the drug in sufficient quantities or where a new formulation of the drug has shown superior safety or efficacy. as a result, if our product is approved and receives orphan drug status, the fda can still approve other drugs for use in treating the same indication covered by our product, which could create a more competitive market for us. moreover, due to the uncertainties associated with developing pharmaceutical products, we may not be the first to obtain marketing approval for any orphan drug indication. even if we obtain orphan drug designation, if a competitor obtains regulatory approval for glufosfamide or 2dg for the same indication we are targeting before us, we would be blocked from obtaining approval for that indication for seven years, unless our product is a new formulation of the drug that has shown superior safety or efficacy, or the competitor is unable to supply sufficient quantities.even if we obtain regulatory approval, our marketed drugs will be subject to ongoing regulatory review. if we fail to comply with continuing united states and foreign regulations, we could lose our approvals to market drugs and our business would be seriously harmed. following initial regulatory approval of any drugs we may develop, we will be subject to continuing regulatory review, including review of adverse drug experiences and clinical results that are reported after our drug products become commercially available. this would include results from any post-marketing tests or vigilance required as a condition of approval. the manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the fda. if a previously unknown problem or problems with a product or a manufacturing and laboratory facility used by us is discovered, the fda or foreign regulatory agency may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. any changes to an 11 approved product, including the way it is manufactured or promoted, often require fda approval before the product, as modified, can be marketed. we and our contract manufacturers will be subject to ongoing fda requirements for submission of safety and other post-market information. if we and our contract manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may: issue warning letters; impose civil or criminal penalties; suspend or withdraw our regulatory approval; suspend any of our ongoing clinical trials; refuse to approve pending applications or supplements to approved applications filed by us; impose restrictions on our operations; close the facilities of our contract manufacturers; or seize or detain products or require a product recall. risks related to our financial performance and operationswe have incurred losses since our inception and anticipate that we will incur significant continued losses for the next several years, and our future profitability is uncertain. we may need substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce or eliminate our drug discovery, product development and commercialization activities. developing drugs, conducting clinical trials, and commercializing products is expensive. our future funding requirements will depend on many factors, including: the progress and cost of our clinical trials and other research and development activities; the costs and timing of obtaining regulatory approval; 12 the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights; the cost and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any; the costs of establishing sales, marketing and distribution capabilities; and the terms and timing of any collaborative, licensing and other arrangements that we may establish. we believe that the net proceeds from this offering, together with our cash on hand, will be sufficient to fund our projected operating requirements for at least the next two years, including clinical trials of glufosfamide, th-070 and 2dg, the initial development of a sales and marketing effort, general corporate purposes and for the research and development of additional product candidates. however, we may need to raise additional capital or incur indebtedness to continue to fund our operations in the future. our ability to raise additional funds will depend on financial, economic and market conditions and other factors, many of which are beyond our control. there can be no assurance that sufficient funds will be available to us when required or on satisfactory terms. if necessary funds are not available, we may have to delay, reduce the scope or eliminate some of our development programs, which could delay the time to market for any of our product candidates. we may also need to seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.raising additional funds may cause dilution to existing stockholders or require us to relinquish valuable rights. we may raise additional funds through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. we cannot be certain that additional funding will be available on acceptable terms, or at all. to the extent that we raise additional funds by issuing equity securities, our stockholders may experience further dilution. debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities. to the extent that we raise additional funds through collaboration and licensing arrangements, it will be necessary to relinquish some rights to our clinical product candidates.if we are unable to establish sales and marketing capabilities, we may be unable to successfully commercialize our cancer and bph product candidates. if our cancer product candidates are approved for commercial sale, we plan to establish our own sales force to market them in the united states and potentially europe. we may also consider establishing a sales force to market th-070 for the treatment of symptomatic bph. we currently have no experience in selling, marketing or distributing pharmaceutical products and do not have a sales force to do so. before we can commercialize any products, we must develop our sales, marketing and distribution capabilities, which is an expensive and time consuming process, and our failure to do this successfully could delay any product launch. our efforts to develop internal sales and marketing capabilities could face a number of risks, including: we may not be able to attract a sufficient number of qualified sales and marketing personnel; the cost of establishing a marketing or sales force may not be justifiable in light of the potential revenues for any particular product; and our internal sales and marketing efforts may not be effective.our success depends in part on recruiting and retaining key personnel and, if we fail to do so, it may be more difficult for us to execute our business strategy. we are currently a small organization and will need to hire additional personnel to execute our business strategy successfully. our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading 13 academic institutions, clinicians and scientists. we are highly dependent upon our senior management and scientific staff, particularly our chief executive officer, dr. harold e. selick, and our founder and president, dr.george f. tidmarsh. we do not have employment contracts with either dr. selick or dr. tidmarsh. we are named as the beneficiary on term life insurance policies covering dr. selick and dr. tidmarsh in the amount of $2 million each. the loss of the services of dr. selick, dr. tidmarsh or one or more of our other key employees could delay or prevent the successful completion of our clinical trials or the commercialization of our product candidates. as of november 30, 2004, we had 42 employees. over the next three to six months, we expect to add a significant number of new employees at an annual cost between $2 and $4 million. our success will depend on our ability to hire additional qualified personnel. competition for qualified personnel in the biotechnology field is intense. we face competition for personnel from other biotechnology and pharmaceutical companies, universities, public and private research institutions and other organizations. we may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. if we are unsuccessful in our recruitment efforts, we may be unable to execute our strategy.as we expand our operations, we may experience difficulties in managing our growth. future growth will impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. in addition, rapid and significant growth will place a strain on our administrative and operational infrastructure. as our operations expand, we expect that we will need to manage additional relationships with collaborators and various third parties, including contract research organizations, manufacturers and others. our ability to manage our operations and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. if we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy.because we have operated as a private company, we have no experience complying with public company obligations, including recently enacted changes in securities laws and regulations. compliance with these requirements will increase our costs and require additional management resources, and we still may fail to comply. we are a small company with limited resources. we have operated as a private company, not subject to many of the requirements applicable to public companies. while we plan to expand our staff if we become public, we may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals. as directed by section 404 of the sarbanes-oxley act of 2002, the sec adopted rules requiring public companies to include a report of management on the companys internal controls over financial reporting in their annual reports on form 10-k. in addition, the independent registered public accounting firm auditing the companys financial statements must attest to and report on managements assessment of the effectiveness of the companys internal controls over financial reporting. this requirement will first apply to our annual report on form 10-k for our fiscal year ending december 31, 2005. substantial uncertainty exists regarding our ability to comply with these requirements by applicable deadlines. if we are unable to complete the required assessment as to the adequacy of our internal control reporting or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of december31, 2005 and future year ends, investors could lose confidence in the reliability of our financial reporting.our facilities in california are located near an earthquake fault, and an earthquake or other natural disaster or resource shortage could disrupt our operations. important documents and records, such as hard copies of our laboratory books and records for our product candidates, are located in our corporate headquarters at a single location in redwood city, california, near active 14 earthquake zones. in the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems, we do not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption. in addition, california from time to time has experienced shortages of water, electric power and natural gas. future shortages and conservation measures could disrupt our operations and could result in additional expense. although we maintain business interruption insurance coverage, the policy specifically excludes coverage for earthquake and flood. risks related to our dependence on third partieswe rely on third parties to manufacture glufosfamide, th-070 and 2dg. if these parties do not manufacture the active pharmaceutical ingredients or finished products of satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost, clinical development and commercialization of our product candidates could be delayed. we do not currently own or operate manufacturing facilities; consequently, we rely and expect to continue to rely on third parties for the production of clinical and commercial quantities of our product candidates. we have not yet entered into any long term manufacturing or supply agreement for any of our product candidates. our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our ability to develop and commercialize any product candidates on a timely and competitive basis. our current supplies of glufosfamide have been prepared by a subsidiary of baxter international, inc. and we are depending on those materials in order to conduct and complete our planned clinical trials. should those materials not remain stable, we may experience a significant delay in the completion of our pivotal phase 3 trial. although we are in the process of qualifying back-up vendors to manufacture glufosfamide active pharmaceutical ingredient, or api, and drug product, we have not yet done so, and we may not be able to do so at an acceptable cost or terms, if at all. we believe that we have sufficient supplies of th-070 api to conduct and complete our currently planned bph clinical trials. we have ordered additional th-070 api from jiangsu hengrui medicine company, ltd. we have recently entered into an agreement with pharmaceutics international, incorporated for the manufacture of th-070 drug product. we have not yet received any api or drug product from these manufacturers. the failure of pharmaceutics international to meet quality requirements or otherwise perform its obligations could significantly delay our th-070 clinical program. in addition, failure of jiangsu hengrui medicine company to provide acceptable api could delay commercialization of th-070, if approved. we believe that we have a sufficient supply of 2dg for our anticipated clinical trials over the next two years, although there can be no assurance that these supplies will remain stable and usable during this period. if these materials are not stable, we may experience a significant delay in our 2dg clinical program. we will need to enter into additional agreements for additional supplies of each of our product candidates to complete clinical development and/or commercialize them. there can be no assurance that we can do so on favorable terms, if at all. for regulatory purposes, we will have to demonstrate comparability of the same drug substance from different manufacturers. our inability to do so could delay our clinical programs. to date, our product candidates have been manufactured in quantities sufficient for preclinical studies or initial clinical trials. if any of our product candidates is approved by the fda or other regulatory agencies for commercial sale, we will need to have it manufactured in commercial quantities. we may not be able to successfully increase the manufacturing capacity for any of our product candidates in a timely or economic manner or at all. significant scale-up of manufacturing may require additional validation studies, which the fda and other regulatory agencies must review and approve. if we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed, or there may be a shortage of supply which could limit our sales. 15 in addition, if the facility or the equipment in the facility that produces our product candidates is significantly damaged or destroyed, or if the facility is located in another country and trade or commerce with such country is interrupted, we may be unable to replace the manufacturing capacity quickly or inexpensively. the inability to obtain manufacturing agreements, the damage or destruction of a facility on which we rely for manufacturing or any other delays in obtaining supply would delay or prevent us from completing our clinical trials and commercializing our current product candidates.we have no control over our manufacturers and suppliers compliance with manufacturing regulations, and their failure to comply could result in an interruption in the supply of our product candidates. the facilities used by our contract manufacturers must undergo an inspection by the fda for compliance with current good manufacturing practice, or cgmp regulations, before the respective product candidates can be approved. in the event these facilities do not receive a satisfactory cgmp inspection for the manufacture of our product candidates, we may need to fund additional modifications to our manufacturing process, conduct additional validation studies, or find alternative manufacturing facilities, any of which would result in significant cost to us as well as a delay of up to several years in obtaining approval for such product candidate. in addition, our contract manufacturers, and any alternative contract manufacturer we may utilize, will be subject to ongoing periodic inspection by the fda and corresponding state and foreign agencies for compliance with cgmp regulations and similar foreign standards. we do not have control over our contract manufacturers compliance with these regulations and standards. any failure by our third-party manufacturers or suppliers to comply with applicable regulations could result in sanctions being imposed on them (including fines, injunctions and civil penalties), failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecution.we rely on third parties to conduct our clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates. we rely almost exclusively on third-party clinical investigators to conduct our clinical trials and other third-party organizations to oversee the operations of such clinical trials and to perform data collection and analysis. we are currently using several third-party clinical investigators. we are also using clinical research organizations to oversee our ongoing glufosfamide and th-070 clinical trials and expect to use the same or similar organizations for our anticipated clinical trials. there are numerous alternative sources to provide these services. however, we may face delays outside of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers. this risk is heightened for our clinical trials conducted outside of the united states, where it may be more difficult to ensure that studies are conducted in compliance with fda requirements. we will rely significantly upon the accrual of patients at clinical sites outside the united states. any third-party that we hire to conduct clinical trials may also provide services to our competitors, which could compromise the performance of their obligations to us. if we experience significant delays in the progress of our clinical trials and in our plans to file ndas, the commercial prospects for product candidates could be harmed and our ability to generate product revenue would be delayed or prevented.we may rely on strategic collaborators to market and sell th-070 for the treatment of bph worldwide and our potential cancer products outside the united states. we have no sales and marketing experience. we may contract with strategic collaborators to sell and market th-070 for the treatment of symptomatic bph worldwide and our cancer products outside the united states. we may not be successful in entering into collaborative arrangements with third parties for the sale and marketing of any products. any failure to enter into collaborative arrangements on favorable terms could delay or hinder our ability to develop and commercialize our product candidates and could increase our costs of development and commercialization. dependence on collaborative arrangements will subject us to a number of risks, including: we may not be able to control the amount or timing of resources that our collaborators may devote to the product candidates; 16 we may be required to relinquish important rights, including intellectual property, marketing and distribution rights; we may have lower revenues than if we were to market and distribute such products ourselves; should a collaborator fail to commercialize one of our product candidates successfully, we may not receive future milestone payments or royalties; a collaborator could separately move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; our collaborators may experience financial difficulties; business combinations or significant changes in a collaborators business strategy may also adversely affect a collaborators willingness or ability to complete its obligations under any arrangement; and our collaborators may operate in countries where their operations could be adversely affected by changes in the local regulatory environment or by political unrest. risks related to our intellectual propertyth-070 and 2dg are known compounds that are not protected by patents as compounds per se. th-070 and 2dg are known compounds that are no longer eligible for patent protection as compounds per se. a compound per se patent excludes others from making, using or selling the patented compound, regardless of how or for what purpose the compound is formulated or intended to be used. consequently, these compounds and certain of their uses are in the public domain. acraf, s.p.a. has rights to market th-070 in certain european countries for the treatment of certain cancer indications, and we cannot prevent its sale for these indications or for indications where we have not received patent protection. even if we obtain patents for th-070 to treat bph, there may be off-label use of competitive products for our patented indications. we have in-licensed one issued patent that covers the treatment of breast cancer with 2dg in combination with paclitaxel or docetaxel and related applications that cover-0.43494218.231175.41102.101373333310.690True2005